Discount function

A discount function is used in economic models to describe the weights placed on rewards received at different points in time. For example, if time is discrete and utility is time-separable, with the discount function

$f(t)$

total utility is given by

$U(\{c_{t}\}_{t=0}^{\infty })=\sum _{t=0}^{\infty }{f(t)*u(c_{t})}$.

The continuous-time case is given by

$U(\{c_{t}\}_{t=0}^{\infty })=\int _{0}^{\infty }{f(t)u(c_{t})dt}$.

Exponential discounting and hyperbolic discounting are the two most commonly used examples.

References

For a comprehensive review, see: Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, vol. 40(2), pages 351-401, June.