TÄNA AJALOOS, 11. juuli ⟩ Avati Tallinna teletorn

In economics, 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:

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

Total utility in the continuous-time case is given by:

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

provided that this integral exists.

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

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.