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Subjective random discounting and intertemporal choice

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  • Higashi, Youichiro
  • Hyogo, Kazuya
  • Takeoka, Norio

Abstract

This paper provides an axiomatic foundation for a particular type of preference shock model called the random discounting representation where a decision maker believes that her discount factors change randomly over time. For this purpose, we formulate an infinite horizon extension of [E. Dekel, B. Lipman, A. Rustichini, Representing preferences with a unique subjective state space, Econometrica 69 (2001) 891-934], and identify the behavior that reduces all subjective uncertainties to those about future discount factors. We also show uniqueness of subjective belief about discount factors. Moreover, a behavioral comparison about preference for flexibility characterizes the condition that one's subjective belief second-order stochastically dominates the other. Finally, the resulting model is applied to a consumption-savings problem.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 144 (2009)
Issue (Month): 3 (May)
Pages: 1015-1053

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Handle: RePEc:eee:jetheo:v:144:y:2009:i:3:p:1015-1053

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: Random discounting Preference for flexibility Subjective states Second-order stochastic dominance;

References

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Citations

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Cited by:
  1. David Dillenberger & Philipp Sadowski, 2011. "Subjective Learning, Second Version," PIER Working Paper Archive 12-007, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 07 Mar 2012.
  2. David Dillenberger & Philipp Sadowski & Juan Sebastian Lleras & Norio Takeoka, 2012. "A Theory of Subjective Learning," PIER Working Paper Archive 12-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Georges Dionne & Geneviève Gauthier & Khemais Hammami & Mathieu Maurice & Jean-Guy Simonato, 2010. "A Reduced Form Model of Default Spreads with Markov-Switching Macroeconomic Factors," Cahiers de recherche, CIRPEE 1042, CIRPEE.
  4. Philipp Sadowski, 2011. "Contingent Preference for Flexibility: Eliciting Beliefs from Behavior," Levine's Working Paper Archive 661465000000001189, David K. Levine.
  5. Eddie Dekel & Barton L. Lipman, 2012. "Costly Self‐Control and Random Self‐Indulgence," Econometrica, Econometric Society, Econometric Society, vol. 80(3), pages 1271-1302, 05.
  6. David Dillenberger & Philipp Sadowski, 2011. "Models of Subjective Learning," PIER Working Paper Archive 11-042, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  7. Braz Camargo & Benjamin Lester, 2011. "Trading dynamics in decentralized markets with adverse selection," Working Papers 11-36, Federal Reserve Bank of Philadelphia.
  8. Sadowski, Philipp, 2013. "Contingent preference for flexibility: eliciting beliefs from behavior," Theoretical Economics, Econometric Society, Econometric Society, vol. 8(2), May.
  9. David Dillenberger & Juan Sebastian Lleras & Philipp Sadowski & Norio Takeoka, 2012. "A Theory of Subjective Learning," Levine's Working Paper Archive 786969000000000583, David K. Levine.

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