ABSTRACT
This chapter looks at a utility function with exponential discounting. The basic idea is that inter-temporal utility, and choice, can be captured by assuming that people discount the future at a constant rate. Time is important in most economic decisions because the choices we make will have future consequences. Inter-temporal choice is one area where the experimental lab does seem inadequate to answer many of the questions we are interested in, because we want to know how people trade off money over relatively large time periods. In principle, it seems entirely consistent with behavioral economics in trying to match plausible assumptions on preferences with observed choices. The axiomatic approach does, however, give definitive answers about when ways of modeling choice are appropriate, and so it clearly does have its place, as Gul and Pesendorfer show. The basic idea here is that inter-temporal utility, and choice, can be captured by assuming that people discount the future at a constant rate.
