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Discounting and the Time Preference Rate

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  • JOHN CREEDY
  • ROSS GUEST

Abstract

This paper provides an analytical review of the evaluation of alternative time streams of consumption and the closely related concept of time preference. The potential sensitivity of comparisons, especially to the choice of time preference rate and elasticity of marginal valuation, is demonstrated. The nature of time preference, based on an axiomatic approach, is then discussed. The analysis of optimisation over time leads to the concept of the social time preference rate, and a difficulty with using this rate is highlighted. Approaches giving rise to declining discount rates over time are discussed, including alternative welfare functions and the role of uncertainty. This is followed by a critique of methods used to ‘estimate’ a time preference rate. Finally, complications introduced by non‐income differences between individuals are examined. Emphasis is placed on the central role of value judgements.

Suggested Citation

  • John Creedy & Ross Guest, 2008. "Discounting and the Time Preference Rate," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 109-127, March.
    • Handle: RePEc:bla:ecorec:v:84:y:2008:i:264:p:109-127
    DOI: 10.1111/j.1475-4932.2008.00450.x
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    Cited by:

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    2. Yohe, Gary W. & Tol, Richard S. J. & Anthoff, David, 2009. "Discounting for Climate Change," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-22.
    3. John Creedy & Hemant Passi, 2018. "Public Sector Discount Rates: A Comparison of Alternative Approaches," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 51(1), pages 139-157, March.
    4. Ferda Halicioglu & Cevat Karatas, 2011. "Estimation of Economic Discounting Rate for Practical Project Appraisal: The Case of Turkey," Journal of Developing Areas, Tennessee State University, College of Business, vol. 45(1), pages 155-166, July-Dece.
    5. Alberto BUCCI & Chiara DEL BO, 2009. "On the interaction between public investment and private capital in economic growth," Departmental Working Papers 2009-44, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    6. Christine Carmody, 2012. "Considering future generations - sustainability in theory and practice," Economic Roundup, The Treasury, Australian Government, issue 3, pages 65-91, October.

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