Volume 20, Number 3 (Summer) 1985
Hancock, Keith, and Sue Richardson. 1985. "Discount Rates and the Distribution of Lifetime Earnings." Journal of Human Resources 20(3):346-360.
The logic of human capital theory implies that the present values of lifetime earnings are computed using the discount rate applied by individuals when making their labor market choices. Further, inequalities will appear when higher or lower discount rates are applied. Our empirical tests confirm that there is a discount rate (of around 10 percent) which minimizes differences in lifetime earnings. A further inference-that there is a negative correlation between two rankings of lifetime earnings when these rankings are computed using discount rates which are, respectively, lower and higher than "the" rate-is also supported empirically.
Hancock's affiliation is the National Institute of Labour Studies, The
Flinders University of South Australia. Richardson's affiliations are the
Department of Economics, The University of Adelaide. and the National Institute
of Labour Studies, The Flinders University of South Australia.
The authors gratefully acknowledge the helpful comments of
Richard Blandy, Bruce Chapman, Henry Phelps Brown, Richard Hemming, Frank Jones,
Robert Lampman, Harold Lydall, Jacob Mincer, Judith Sloan, the members of a
seminar on Income Distribution and Redistribution held by the Institute of
Applied Economics and Social Research at the University of Melbourne in August
1981, and the referees of this Journal. They also thank Frances Robertson for
her contributions to the solution of computing problems.
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