Dynamic Preference for Flexibility

46 Pages Posted: 21 Sep 2012 Last revised: 25 Sep 2012

See all articles by R. Vijay Krishna

R. Vijay Krishna

Florida State University - Department of Economics

Philipp Sadowski

Duke University - Department of Economics

Date Written: July 19, 2012

Abstract

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.

Suggested Citation

Krishna, R. Vijay and Sadowski, Philipp, Dynamic Preference for Flexibility (July 19, 2012). Economic Research Initiatives at Duke (ERID) Working Paper No. 133, Available at SSRN: https://ssrn.com/abstract=2149771 or http://dx.doi.org/10.2139/ssrn.2149771

R. Vijay Krishna

Florida State University - Department of Economics ( email )

Tallahassee, FL 30306-2180
United States

Philipp Sadowski (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States
919-660-1800 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
77
Abstract Views
1,253
Rank
561,161
PlumX Metrics