Discount function

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A discount function is used in economic models to describe the weights placed on rewards received at different points in time. For example, if time is discrete and utility is time-separable, with the discount function having a negative first derivative and with (or in continuous time) defined as consumption at time t, total utility from an infinite stream of consumption is given by

.

Total utility in the continuous-time case is given by

provided that this integral exists.

Exponential discounting and hyperbolic discounting are the two most commonly used examples.

See also[edit]

References[edit]

  • Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," ;;Journal of Economic Literature;;, vol. 40(2), pages 351-401, June.