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Subjective states: A more robust model

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  • Epstein, Larry G.
  • Seo, Kyoungwon

Abstract

We study the demand for flexibility and what it reveals about subjective uncertainty. As in Kreps [D. Kreps, 1979. A representation theorem for 'preference for flexibility'. Econometrica 47, 565-577], Nehring [K. Nehring, 1996. Preference for flexibility and freedom of choice in a Savage framework. UC Davis Working Paper; K. Nehring, 1999. Preference for flexibility in a Savage framework. Econometrica 67, 101-119] and Dekel et al. [E. Dekel, B. Lipman, A. Rustichini, 2001. Representing preferences with a unique subjective state space. Econometrica 69, 891-934], the latter is represented by a subjective state space consisting of possible future preferences over actions to be chosen ex post. One contribution is to provide axiomatic foundations for a range of alternative hypotheses about the nature of these ex post preferences. Secondly, we establish a sense in which the subjective state space is uniquely pinned down by the ex ante ranking of (random) menus. Finally, we demonstrate the tractability of our representation by showing that it can model the two comparative notions "2 desires more flexibility than 1" and "2 is more averse to flexibility-risk than is 1."

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Bibliographic Info

Article provided by Elsevier in its journal Games and Economic Behavior.

Volume (Year): 67 (2009)
Issue (Month): 2 (November)
Pages: 408-427

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Handle: RePEc:eee:gamebe:v:67:y:2009:i:2:p:408-427

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Web page: http://www.elsevier.com/locate/inca/622836

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  1. Klaus Nehring, 1999. "Preference for Flexibility in a Savage Framework," Econometrica, Econometric Society, vol. 67(1), pages 101-120, January.
  2. Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Klaus Nehring, 2003. "Preference for Flexibility and Freedom of Choice in a Savage Framework," Working Papers 9615, University of California, Davis, Department of Economics.
  4. Epstein, Larry G. & Peters, Michael, 1999. "A Revelation Principle for Competing Mechanisms," Journal of Economic Theory, Elsevier, vol. 88(1), pages 119-160, September.
  5. Epstein, Larry G. & Marinacci, Massimo & Seo, Kyoungwon, 2007. "Coarse contingencies and ambiguity," Theoretical Economics, Econometric Society, vol. 2(4), December.
  6. Chew, Soo Hong, 1983. "A Generalization of the Quasilinear Mean with Applications to the Measurement of Income Inequality and Decision Theory Resolving the Allais Paradox," Econometrica, Econometric Society, vol. 51(4), pages 1065-92, July.
  7. Grandmont, Jean-Michel, 1972. "Continuity properties of a von Neumann-Morgenstern utility," Journal of Economic Theory, Elsevier, vol. 4(1), pages 45-57, February.
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Cited by:
  1. Sarver, Todd & Ergin, Haluk, 0. "Hidden actions and preferences for timing of resolution of uncertainty," Theoretical Economics, Econometric Society.
  2. André Lapied & Thomas Rongiconi, 2013. "Ambiguity as a Source of Temptation: Modeling Unstable Beliefs," Working Papers halshs-00797631, HAL.

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