Hyperbolic Discounting and Economic Policy

• Authors: Benedek Nagy
• Languages of publication: EN

Abstracts

EN

Economic policy-making often entails comparison between immediate costs and flows of future benefits or immediate benefits and series of future costs. Economics has a tool to handle such comparisons: the present- and future value calculations and the net present value rule. Experimental economics, however, has strongly criticised the method of exponential discounting applied in such calculations. Based on experiments for the sake of more psychological realism, they propose alternative methods to the exponential model: hyperbolic and quasi-hyperbolic discounting models.The present paper has a twofold objective: first, to review these different models and the relationships between them to show how the different models will yield different results when calculating and comparing present values of a single future payment, but even more if we compare present values of flows of future payments. The literature has not yet employed the hyperbolic and quasi-hyperbolic models for such calculations. Second, I point out why it is important to heed the findings of experimental economics especially in the field of economic policy-making.

Keywords

EN

hyperbolic discounting; present value calculation; annuity

• Publisher: Sciendo
• Journal: Review of Economic Perspectives
• Year: 2010
• Volume: 10
• Issue: 3
• Pages: 71-86

Dates

published

2010-01-01

online

2010-10-18

Contributors

author

Benedek Nagy

• University of Szeged, Hungary, 6722 Szeged, Kálvária Av. 1

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Identifiers

DOI

10.2478/v10135-009-0010-7