Dynamic economics with quantile preferences

Luciano I. de Castro (), Antonio Galvao and Daniel da Siva Nunes ()
Additional contact information
Luciano I. de Castro: Department of Economics, University of Iowa
Daniel da Siva Nunes: Instituto Nacional de Matematica Pura e Aplicada (IMPA)

Theoretical Economics, 2025, vol. 20, issue 1

Abstract: This paper studies a dynamic quantile model for intertemporal decisions under uncertainty, in which the decision maker maximizes the $\tau$-quantile of the stream of future utilities, for $\tau\in (0,1)$. We present two sets of contributions. First, we generalize existing results in directions that are important for applications. In particular, the sets of choices and random shocks are general metric spaces, either connected or finite. Moreover, the future state is not exclusively determined by agent's choice, but can also be influenced by shocks. Under these generalizations, we establish the Principle of Optimality, show that the corresponding dynamic problem yields a value function and, under suitable assumptions, this value function is concave and differentiable. Additionally, we derive the corresponding Euler equation. Second, we illustrate the usefulness of this approach by studying two prominent dynamic economics models. The first deals with intertemporal consumption with one asset. We obtain closed form expressions for the value function, the optimal asset allocation and consumption, as well as for the consumption path. These closed form solutions allow us to obtain useful comparative statics that shed light on how consumption and savings respond to increase in risk aversion, impatience and interest rates. For the second model, we discuss a quantile-based version of the job-search model with uncertainty.

Keywords: Quantile preferences; dynamic programming; recursive model; intertemporal consumption; job search with unemployment (search for similar items in EconPapers)
JEL-codes: C61 D11 E2 (search for similar items in EconPapers)
Date: 2025-01-28
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://econtheory.org/ojs/index.php/te/article/viewFile/20250353/41168/1275 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:the:publsh:5454

Access Statistics for this article

Theoretical Economics is currently edited by Simon Board, Todd D. Sarver, Juuso Toikka, Rakesh Vohra, Pierre-Olivier Weill

More articles in Theoretical Economics from Econometric Society
Bibliographic data for series maintained by Martin J. Osborne ().