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In behavioral economics, time preference (or time discounting, [1] delay discounting, temporal discounting, [2] long-term orientation [3]) is the current relative valuation placed on receiving a good at an earlier date compared with receiving it at a later date. [1] Applications for these preferences include finance, health, climate change.
In macroeconomics, the Keynes–Ramsey rule is a necessary condition for the optimality of intertemporal consumption choice. [1] Usually it is expressed as a differential equation relating the rate of change of consumption with interest rates, time preference, and (intertemporal) elasticity of substitution.
In economics, intertemporal choice is the study of the relative value people assign to two or more payoffs at different points in time. This relationship is usually simplified to today and some future date.
It is calculated as the present discounted value of future utility, and for people with time preference for sooner rather than later gratification, it is less than the future utility. The utility of an event x occurring at future time t under utility function u, discounted back to the present (time 0) using discount factor β, is
Economic theories of intertemporal consumption seek to explain people's preferences in relation to consumption and saving over the course of their lives. The earliest work on the subject was by Irving Fisher and Roy Harrod, who described 'hump saving', hypothesizing that savings would be highest in the middle years of a person's life as they saved for retirement.
where is time preference, is the elasticity of marginal utility of consumption and is the growth rate. There is a strong case for factoring in the equity issue when discounting benefits and costs of intergenerational projects such as those designed to combat climate change and environmental degradation .
If the real interest rate rises, current consumption may decrease due to increased return on savings; but current consumption may also increase as the household decides to consume more immediately, as it is feeling richer. The net effect on current consumption is the elasticity of intertemporal substitution. [2]
Consumption smoothing is an economic concept for the practice of optimizing a person's standard of living through an appropriate balance between savings and consumption over time. An optimal consumption rate should be relatively similar at each stage of a person's life rather than fluctuate wildly. [1] [2] Luxurious consumption at an old age ...