State (wealth)-dependent discounting of future resources Online publication date: Thu, 24-Mar-2016
by Thomas Bishop
International Journal of Decision Sciences, Risk and Management (IJDSRM), Vol. 6, No. 2, 2015
Abstract: I derive a function to represent how consumers discount the value of future resources, a function which depends on the amount (state) of presently available resources (wealth) relative to expected income in the long-run future. When presently available resources are scarce in the sense that consumers are borrowing constrained, this discount function approaches zero, implying that we put zero weight on the value of future resources and are concerned entirely about having sufficient resources for the present. When the amount of presently available resources relative to expected income is ample, this discount function approaches or approximates a constant future discount factor in a timeseparable expected utility function. The wealth-dependent discount function is positively related to aversion of future risks in consumption resources at low and moderate levels of risk aversion, so that we are predicted to discount future resources less as we become more risk averse.
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