Econometrica

Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens ā€¢ Print ISSN: 0012-9682 ā€¢ Online ISSN: 1468-0262

Econometrica: Mar, 2014, Volume 82, Issue 2

Dynamic Preference for Flexibility

https://doi.org/10.3982/ECTA10072
p. 655-703

R. Vijay Krishna, Philipp Sadowski

We consider a decision maker who faces dynamic decision situations that involve intertemporal tradeā€offs, as in consumptionā€“savings problems, and who experiences taste shocks that are transient contingent on the state of the world. We axiomatize a recursive representation of choice over state contingent infinite horizon consumption problems, where uncertainty about consumption utilities depends on the observable state and the state follows a subjective Markov process. The parameters of the representation are the subjective process that governs the evolution of beliefs over consumption utilities and the discount factor; they are uniquely identified from behavior. We characterize a natural notion of greater preference for flexibility in terms of a dilation of beliefs. An important special case of our representation is a recursive version of the Anscombeā€“Aumann model with parameters that include a subjective Markov process over states and stateā€dependent utilities, all of which are uniquely identified.


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