Discount functions and the use of the memoryless property in dynamic economic analysis

Abstract

Maximizing a stream of present value stock often requires the use of dynamic economic analysis. To bring all future values into present value terms, we use the discount function. I present a pedagogical supplement to show that this discount function must follow an exponential distribution. This paper serves as a helpful tool to all instructors and graduate students that use discounting functions. It offers to describe the discount function from a different perspective that could make the interpretation of the discount function more easily understandable.