Intertemporal Risk Aversion, Stationarity and Discounting

Abstract: The paper develops an axiomatic framework that derives a new relation be-tween discounting and uncertainty evaluation. The von Neumann and Morgenstern ax-ioms give rise to a richer form of risk attitude than captured in the discounted expected utility standard model. I derive three models that permit a more comprehensive uncer-tainty evaluation. These preference representations differ in the consistency requirements imposed on the evaluation of uncertain scenarios. A central result is that for an intertem-poral risk averse decision maker a stationary risk evaluation can restrict the rate of pure time preference to zero (no impatience). Such a decision maker still gives reduced weight to future utility when uncertainty is increasing over time. If uncertainty is endogenous to the decision process, this new rationale for discounting can yield very different policy implications