Matei N. A., Zoli C. (2012).
Restricted Finite Time Dominance. (ISSN: 2036-2919 N.30). University of Verona DSE Working Paper series
We investigate intertemporal dominance conditions for comparisons of finite unidimensional streams of outcomes in discrete time. We follow Ekern’s [1981, Time dominance efficiency analysis. Journal of Finance, 36, pp.1023-1034] approach based on unanimous net present value comparisons for classes of discount factors representing temporal preferences. In order to overcome the problem of dictatorship of the present in intertemporal evaluations we restrict the class of discount factors, by imposing a limit on the decrease of the weight attached in the current evaluation, between the outcomes of two future adjacent periods. The restricted time dominance theorems provide parametric dominance conditions that make explicit the policy maker’s trade-off between current and future periods. We show that these conditions can be summarized by a single cutoff point that can be interpreted as maximal decrease in the discount factor that guarantees unanimous dominance for the class of intertemporal evaluations considered.