Discounting the Subjective Present and Future

Economics

Speaker:Craig Webb, University of Manchester
Date: Friday 23 November 2012
Time: 16.15
Location: Matrix Lecture Theatre, Building One

Further details

The propensity to forgo current for future utility is known as a discount rate. In this paper we study a model we call Liminal Discounting (LD). This model generalises exponential discounting model in a simple way. Essentially, LD adds just one more parameter. This allows for certain behavioural regularities, whilst maintaining much of the elegance and tractability of the classical model. An individual with such preferences has a constant rate of time preference up to some threshold point in time; the liminal point. After this point the rate may change, but will then remain constant. We present the model as applied to instantaneous choice and dynamic choice. In one interpretation, the liminal point is an absolute point in time. Then, LD reveals time consistent behaviour. Alternatively, the liminal point is expressed in relative time and LD reveals time invariant behaviour. We present a preference foundation for the instantaneous choice case, two foundations for time consistent LD, and two foundations for time invariant LD. The threshold time arises, in each case, as a consequence of our preference axioms. In each dynamic case we study the equilibria of Rubinstein bargaining games, showcasing the LD model's applicability to microeconomic theory.