A Paradox in Time Preference

For decisions whose consequences accrue over time, several techniques are possible to compute total utility. One is to discount utilities of future consequences at some appropriate rate. The second is to discount per-period certainty equivalents. And the third is to compute net present value of various possible streams and then apply utility function to these net present values. When consequences are income streams, our main result shows that for a strict concave utility function, discounting utilities of incomes or discounting per period certainty equivalents can result in a paradoxical preference for receiving more money later to more money now. For income streams, the correct approach is to …rst compute net present values of various possible income streams and then take the utility of such net present value. The discounted utility model is appropriate for consumption streams, provided that the time intervals between periods are sufficiently large. Otherwise, we have the unrealistic situation where a short delay in consumption produces a discontinuous jump in the utility evaluation