Discount function

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 $f(t)$ having a negative first derivative and with $c_{t}$ (or $c(t)$ in continuous time) defined as consumption at time t, total utility from an infinite stream of consumption is given by

$U(\{c_{t}\}_{t=0}^{\infty })=\sum _{t=0}^{\infty }{f(t)u(c_{t})}$.

Total utility in the continuous-time case is given by

$U(\{c(t)\}_{t=0}^{\infty })=\int _{0}^{\infty }{f(t)u(c(t))dt}$

provided that this integral exists.

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

See also

• Discounted utility
• Intertemporal choice
• Temporal discounting

References

• 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.