Time Preference and its Effects on Intertemporal

Abstract

Time preference has a peculiar role in determining the level of economic activities. Time preferenceis the most important origin of interest rate. In this paper we study the founders and defenders'viewpoints about time preference and then we try to criticize them. It seems that discounting futureutilities is resulting from irrationality and it is ethically indefensible too. From mathematical aspect,discounting is necessary because it convergences sum of social welfare function to some finitenumber and so the optimal time path for consumption is attained. But this isn't true for a growingpopulation. It seems that there aren't any rational reasons for preferring current generation's welfareto future generations'.If we have time preference, in intertemporal allocation, it reduces available resources forfuture consumption and so the level of saving will be decreased. We study a numerical example foraffecting time path of an ore extraction of a nonrenewable resource. Results show that the higher thetime preference, the higher the rate of extraction will be occurred. Because with a high rate for timepreference, present value of cash flows will be discounted more strongly and it increases theincentive to mine the more quicklyJEL Classification: C61, D91, Q32, E43