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Dynamic Preference for Flexibility

  • R. Vijay Krishna
  • Philipp Sadowski
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    We consider a decision maker who experiences transient preference shocks when faced with dynamic decision situations that involve intertemporal tradeoffs, such as those in consumption savings problems. We axiomatize a recursive representation of choice over infinite horizon consumption problems that features uncertain consumption utilities that evolve according to a subjective process that is iid. A generalization of the model introduces objective states of the world and accommodates persistent taste shocks that are transient, contingent on the state. In the corresponding representation the uncertainty about utilities depends on the exogenous state, which follows a subjective Markov process. The parameters of the representations, which are the subjective processes governing the evolution of beliefs over consumption utilities, and the discount factor, are uniquely identified from behavior. We characterize a natural notion of greater preference for flexibility in terms of a dilation of beliefs.

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    Paper provided by Duke University, Department of Economics in its series Working Papers with number 12-16.

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    Length: 46
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:duk:dukeec:12-16
    Contact details of provider: Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
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    Web page: http://econ.duke.edu/

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