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Hidden Actions and Preferences for Timing of Resolution of Uncertainty

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  • Haluk Ergin
  • Todd Sarver

Abstract

We study preferences for timing of resolution of objective uncertainty in a menu-choice model with two stages of information arrival. We characterize a general class of utility representations called hidden action representations, which interpret an intrinsic preference for timing of resolution of uncertainty as if an unobservable action is taken between the resolution of the two periods of information arrival. These representations permit a richer class of preferences for timing than was possible in the model of Kreps and Porteus (1978) by incorporating a preference for flexibility. Our model contains several special cases where this hidden action can be given a novel economic interpretation, including a subjective-state-space model of ambiguity aversion and a model of costly contemplation.

Suggested Citation

  • Haluk Ergin & Todd Sarver, 2012. "Hidden Actions and Preferences for Timing of Resolution of Uncertainty," Discussion Papers 1567, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1567
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    References listed on IDEAS

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    1. Epstein, Larry G. & Seo, Kyoungwon, 2009. "Subjective states: A more robust model," Games and Economic Behavior, Elsevier, vol. 67(2), pages 408-427, November.
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    1. repec:spr:joecth:v:65:y:2018:i:3:d:10.1007_s00199-016-1025-9 is not listed on IDEAS
    2. 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.
    3. Pennesi, Daniele, 2015. "Costly information acquisition and the temporal resolution of uncertainty," Journal of Mathematical Economics, Elsevier, vol. 60(C), pages 115-122.
    4. repec:eee:jetheo:v:176:y:2018:i:c:p:727-760 is not listed on IDEAS
    5. Todd Sarver, 2012. "Optimal Reference Points and Anticipation," Discussion Papers 1566, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

    More about this item

    Keywords

    temporal preferences; preference for flexibility; hidden action; subjective uncertainty;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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