Discounting and the Time Preference Rate: An Introduction

This paper provides an introduction to 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. Finally, complications introduced by non-income differences between individuals are examined. Emphasis is placed on the central role of value judgements.