IDEAS home Printed from https://ideas.repec.org/a/eee/jetheo/v181y2019icp274-288.html

Recursive utility and parameter uncertainty

Author

Listed:
  • Al-Najjar, Nabil I.
  • Shmaya, Eran

Abstract

We explore how the Epstein–Zin utility captures an agent's sensitivity to parameter uncertainty. Our main result is a closed-form representation of the Epstein–Zin utility for an i.i.d. consumption process with unknown parameter, as the discount factor approaches 1. Using this representation, and under the usual assumption about the relationship between risk aversion and the attitude towards time smoothing, we show that the agent is averse to parameter uncertainty.

Suggested Citation

  • Al-Najjar, Nabil I. & Shmaya, Eran, 2019. "Recursive utility and parameter uncertainty," Journal of Economic Theory, Elsevier, vol. 181(C), pages 274-288.
    • Handle: RePEc:eee:jetheo:v:181:y:2019:i:c:p:274-288
    DOI: 10.1016/j.jet.2019.02.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022053118302874
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jet.2019.02.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Bruno Ziliotto, 2016. "A Tauberian Theorem for Nonexpansive Operators and Applications to Zero-Sum Stochastic Games," Mathematics of Operations Research, INFORMS, vol. 41(4), pages 1522-1534, November.
    2. 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..
    3. Al-Najjar, Nabil I. & Shmaya, Eran, 2018. "Learning the fundamentals in a stationary environment," Games and Economic Behavior, Elsevier, vol. 109(C), pages 616-624.
    4. Larry G. Epstein & Emmanuel Farhi & Tomasz Strzalecki, 2014. "How Much Would You Pay to Resolve Long-Run Risk?," American Economic Review, American Economic Association, vol. 104(9), pages 2680-2697, September.
    5. Marinacci, Massimo & Montrucchio, Luigi, 2010. "Unique solutions for stochastic recursive utilities," Journal of Economic Theory, Elsevier, vol. 145(5), pages 1776-1804, September.
    6. Antoine Bommier & Asen Kochov & François Le Grand, 2017. "On Monotone Recursive Preferences," Econometrica, Econometric Society, vol. 85, pages 1433-1466, September.
    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.
    8. Nabil I. Al-Najjar & Eran Shmaya, 2015. "Uncertainty and Disagreement in Equilibrium Models," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 778-808.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Conrad Kosowsky, 2024. "Reinterpreting Delay and Procrastination," Papers 2411.11828, arXiv.org, revised Sep 2025.
    2. Asen Kochov & Yangwei Song, 2023. "Intertemporal Hedging and Trade in Repeated Games With Recursive Utility," Econometrica, Econometric Society, vol. 91(6), pages 2333-2369, November.
    3. Thomas J. Sargent & John Stachurski, 2024. "Dynamic Programming: Finite States," Papers 2401.10473, arXiv.org.
    4. Ashkenazi-Golan, Galit & Karos, Dominik & Lehrer, Ehud, 2025. "A taste for variety," Games and Economic Behavior, Elsevier, vol. 152(C), pages 396-422.
    5. Fudenberg, Drew & Lanzani, Giacomo & Strack, Philipp, 2023. "Pathwise concentration bounds for Bayesian beliefs," Theoretical Economics, Econometric Society, vol. 18(4), November.
    6. Ashkenazi-Golan, Galit & Karos, Dominik & Lehrer, Ehud, 2025. "A taste for variety," LSE Research Online Documents on Economics 128109, London School of Economics and Political Science, LSE Library.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lorenzo Maria Stanca, 2023. "Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty," Papers 2304.04599, arXiv.org, revised Mar 2026.
    2. Lorenzo Stanca, 2023. "Recursive Preferences, Correlation Aversion, and the Temporal Resolution of Uncertainty," Carlo Alberto Notebooks 693 JEL Classification: C, Collegio Carlo Alberto, revised 2025.
    3. Stanca Lorenzo, 2023. "Recursive preferences, correlation aversion, and the temporal resolution of uncertainty," Working papers 080, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    4. Yifan Zhao & Arnab Basu & Thomas S. Lontzek & Karl Schmedders, 2023. "The Social Cost of Carbon When We Wish for Full-Path Robustness," Management Science, INFORMS, vol. 69(12), pages 7585-7606, December.
    5. Mu Zhang, 2021. "A Theory of Choice Bracketing under Risk," Papers 2102.07286, arXiv.org, revised Aug 2021.
    6. Patrick DeJarnette & David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2020. "Time Lotteries and Stochastic Impatience," Econometrica, Econometric Society, vol. 88(2), pages 619-656, March.
    7. Lorenzo Stanca, 2025. "Restricted dynamic consistency," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 80(4), pages 1203-1231, December.
    8. Meissner, Thomas & Pfeiffer, Philipp, 2022. "Measuring preferences over the temporal resolution of consumption uncertainty," Journal of Economic Theory, Elsevier, vol. 200(C).
    9. Thomas J. Sargent & John Stachurski, 2024. "Dynamic Programming: Finite States," Papers 2401.10473, arXiv.org.
    10. Antoine Bommier & Daniel Harenberg & François Le Grand & Cormac O'Dea, 2020. "Recursive Preferences, the Value of Life, and Household Finance," Cowles Foundation Discussion Papers 2231R, Cowles Foundation for Research in Economics, Yale University, revised Dec 2020.
    11. David Dillenberger & Daniel Gottlieb & Pietro Ortoleva, 2017. "Stochastic Impatience and the Separation of Time and Risk Preferences," PIER Working Paper Archive 20-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 05 Jul 2020.
    12. Luca De Gennaro Aquino & Sascha Desmettre & Yevhen Havrylenko & Mogens Steffensen, 2024. "Equilibrium control theory for Kihlstrom-Mirman preferences in continuous time," Papers 2407.16525, arXiv.org, revised Oct 2024.
    13. Bloise, Gaetano & Vailakis, Yiannis, 2018. "Convex dynamic programming with (bounded) recursive utility," Journal of Economic Theory, Elsevier, vol. 173(C), pages 118-141.
    14. Kirsten I. M. Rohde & Xiao Yu, 2024. "Intertemporal Correlation Aversion—A Model-Free Measurement," Management Science, INFORMS, vol. 70(6), pages 3493-3509, June.
    15. Patrick Augustin & Roméo Tédongap, 2021. "Disappointment Aversion, Term Structure, and Predictability Puzzles in Bond Markets," Management Science, INFORMS, vol. 67(10), pages 6266-6293, October.
    16. Ferraz, Eduardo & Mantilla, César, 2024. "How risk aversion shapes the trade-off between commitment and flexibility," Journal of Economic Behavior & Organization, Elsevier, vol. 227(C).
    17. Mohammed Abdellaoui & Enrico Diecidue & Emmanuel Kemel & Ayse Onculer, 2022. "Temporal Risk: Utility vs. Probability Weighting," Management Science, INFORMS, vol. 68(7), pages 5162-5186, July.
    18. Bloise, G. & Van, C. Le & Vailakis, Y., 2024. "An approximation approach to dynamic programming with unbounded returns," Journal of Mathematical Economics, Elsevier, vol. 111(C).
    19. Jay Lu & Yao Luo & Kota Saito & Yi Xin, 2024. "Did Harold Zuercher Have Time-Separable Preferences?," Papers 2406.07809, arXiv.org.
    20. AJ A. Bostian & Christoph Heinzel, 2018. "Comparative precautionary saving under higher-order risk and recursive utility," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(1), pages 95-114, May.

    More about this item

    Keywords

    ;
    ;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E7 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:181:y:2019:i:c:p:274-288. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/622869 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.