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Is Intertemporal Choice Theory Testable?

In: Computational Aspects of General Equilibrium Theory

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  • Felix Kubler

    (University of Pennsylvania)

Abstract

Kreps-Porteus preferences constitute a widely used alternative to time separability. We show in this paper that with these preferences utility maximization does not impose any observable restrictions on a household—s savings decisions or on choices in good markets over time. The additional assumption of a weakly separable aggregator is needed to ensure that the assumption of utility maximization restricts intertemporal choices. Under this assumption, choices in spot markets are characterized by a strong axiom of revealed preferences (SSARP). Under uncertainty Kreps-Porteus preferences impose observable restrictions on portfolio choice if one observes the last period of an individual—s planning horizon. Otherwise there are no restrictions.

Suggested Citation

  • Felix Kubler, 2008. "Is Intertemporal Choice Theory Testable?," Lecture Notes in Economics and Mathematical Systems, in: Computational Aspects of General Equilibrium Theory, pages 79-91, Springer.
    • Handle: RePEc:spr:lnechp:978-3-540-76591-2_7
    DOI: 10.1007/978-3-540-76591-2_7
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    References listed on IDEAS

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    1. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    2. Chiappori, Pierre-Andre & Rochet, Jean-Charles, 1987. "Revealed Preferences and Differentiable Demand: Notes and Comments," Econometrica, Econometric Society, vol. 55(3), pages 687-691, May.
    3. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
    4. Felix Kubler, 2008. "Observable Restrictions of General Equilibrium Models with Financial Markets," Lecture Notes in Economics and Mathematical Systems, in: Computational Aspects of General Equilibrium Theory, pages 93-108, Springer.
    5. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    6. Donald J. Brown & Rosa L. Matzkin, 2008. "Testable Restrictions on the Equilibrium Manifold," Lecture Notes in Economics and Mathematical Systems, in: Computational Aspects of General Equilibrium Theory, pages 11-25, Springer.
    7. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
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    Cited by:

    1. Ian Crawford, 2007. "A nonparametric analysis of habits models," CeMMAP working papers CWP30/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    2. Crawford, Ian & Polisson, Matthew, 2014. "Testing for intertemporal nonseparability," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 46-49.
    3. Angelo Melino & Alan X. Yang, 2003. "State Dependent Preferences Can Explain the Equity Premium Puzzle," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 806-830, October.
    4. Kubler, Felix & Selden, Larry & Wei, Xiao, 2020. "Incomplete market demand tests for Kreps-Porteus-Selden preferences," Journal of Economic Theory, Elsevier, vol. 185(C).

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