Timing Decisions under Model Uncertainty

Sarah Auster () and Christian Kellner ()
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Sarah Auster: Department of Economics, University of Bonn and CEPR
Christian Kellner: Department of Economics, University of Southampton

No 252, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: We study the effect of ambiguity on timing decisions. An agent faces a stopping problem with an uncertain stopping payoff and a stochastic time limit. The agent is unsure about the correct model quantifying the uncertainty and seeks to maximize her payoff guarantee over a set of plausible models. As time passes and the agent updates, the worst-case model used to evaluate a given strategy can change, creating a problem of dynamic inconsistency. We characterize the stopping behavior in this environment and show that, while the agent’s myopic incentives are fragile to small changes in the set of considered models, the best consistent plan from which no future self has incentives to deviate is robust.

Keywords: Stopping problem; ambiguity; consistent planning (search for similar items in EconPapers)
JEL-codes: C61 D81 D83 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2023-09
New Economics Papers: this item is included in nep-mic and nep-upt
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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_252_2023.pdf First version, 2023 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:252

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