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Recursive utility and parameter uncertainty

Al-Najjar, Nabil I. and Eran Shmaya

Journal of Economic Theory, 2019, vol. 181, issue C, 274-288

Abstract: We explore how the Epstein–Zin utility captures an agent's sensitivity to parameter uncertainty. Our main result is a closed-form representation of the Epstein–Zin utility for an i.i.d. consumption process with unknown parameter, as the discount factor approaches 1. Using this representation, and under the usual assumption about the relationship between risk aversion and the attitude towards time smoothing, we show that the agent is averse to parameter uncertainty.

Keywords: Recursive utility; Parameter uncertainty (search for similar items in EconPapers)
JEL-codes: C6 E7 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:jetheo:v:181:y:2019:i:c:p:274-288