Microfoundations of Discounting
Abstract
An important question in economics is how people choose between different payments in the future. The classical normative model predicts that a decision maker discounts a later payment relative to an earlier one by an exponential function of the time between them. Descriptive models use nonexponential functions to fit observed behavioral phenomena, such as preference reversal. Here we propose a model of discounting, consistent with standard axioms of choice, in which decision makers maximize the growth rate of their wealth. Four specifications of the model produce four forms of discounting  no discounting, exponential, hyperbolic, and a hybrid of exponential and hyperbolic  two of which predict preference reversal. Our model requires no assumption of behavioral bias or payment risk.
 Publication:

arXiv eprints
 Pub Date:
 October 2019
 arXiv:
 arXiv:1910.02137
 Bibcode:
 2019arXiv191002137A
 Keywords:

 Economics  Theoretical Economics;
 Economics  General Economics