Subjective random discounting and intertemporal choice

Youichiro Higashi, Kazuya Hyogo and Norio Takeoka

Journal of Economic Theory, 2009, vol. 144, issue 3, pages 1015-1053

Abstract: This paper provides an axiomatic foundation for a particular type of preference shock model called the random discounting representation where a decision maker believes that her discount factors change randomly over time. For this purpose, we formulate an infinite horizon extension of [E. Dekel, B. Lipman, A. Rustichini, Representing preferences with a unique subjective state space, Econometrica 69 (2001) 891-934], and identify the behavior that reduces all subjective uncertainties to those about future discount factors. We also show uniqueness of subjective belief about discount factors. Moreover, a behavioral comparison about preference for flexibility characterizes the condition that one's subjective belief second-order stochastically dominates the other. Finally, the resulting model is applied to a consumption-savings problem.

Keywords: Random; discounting; Preference; for; flexibility; Subjective; states; Second-order; stochastic; dominance (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jetheo:v:144:y:2009:i:3:p:1015-1053

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