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Recursive utility and preferences for information

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Author Info
Costis Skiadas () (J.L. Kellogg Graduate School of Management, Northwestern University, Evanston, IL 60208-2001, USA)
Abstract

This paper presents an axiomatic foundation for recursive utility that captures the role of the timing of resolution of uncertainty without relying on exogenously specified objective beliefs. Two main representation results are proved. In the first one, future utility enters the recursion through the type of general aggregators considered in Skiadas (1997a), and as a result the formulation is purely ordinal and free of any probabilities. In the second representation these aggregators are conditional expectations relative to subjective beliefs. A new recursive representation incorporating disappointment aversion is also suggested. The main methodological innovation of the paper derives from the fact that the basic objects of choice are taken to be pairs of state-contingent consumption plans and information filtrations, rather than the temporal (objective) lotteries of the existing literature. It is shown that this approach has the additional benefit of being directly applicable to the continuous-time version of recursive utility developed by Duffie and Epstein (1992).

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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 12 (1998)
Issue (Month): 2 ()
Pages: 293-312
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Handle: RePEc:spr:joecth:v:12:y:1998:i:2:p:293-312

Note: Received: February 18, 1997; revised version: July 18, 1997
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Find related papers by JEL classification:
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

Cited by:
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  1. Hisashi Nakamura & Keita Nakayama & Akihiko Takahashi, 2008. "Term Structure of Interest Rates Under Recursive Preferences in Continuous Time," Asia-Pacific Financial Markets, Springer, vol. 15(3), pages 273-305, December. [Downloadable!] (restricted)
  2. Marciano Siniscalchi, 2006. "Dynamic Choice Under Ambiguity," Discussion Papers 1430, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  3. Frode Brevik & Stefano d'Addona, 2007. "Information processing with recursive utility: some intriguing results," University of St. Gallen Department of Economics working paper series 2007 2007-40, Department of Economics, University of St. Gallen. [Downloadable!]
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