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Subjective random discounting and intertemporal choice

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

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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