Intertemporal Hedging and Trade in Repeated Games With Recursive Utility
Asen Kochov and
Yangwei Song
Econometrica, 2023, vol. 91, issue 6, 2333-2369
Abstract:
Two key features distinguish the general class of recursive preferences from the standard model of dynamic choice: (i) agents may care about the intertemporal distribution of risk, and (ii) their rates of time preference, rather than being fixed, may vary with the level of consumption. We investigate what these features imply in the context of a repeated strategic interaction. First, we show that opportunities for intertemporal trade may expand the set of feasible payoffs relative to that in a static interaction. Two distinct sources for such trade are identified: endogenous heterogeneity in the players' rates of time preference and a hedging motive pertaining to the intertemporal distribution of risk. The set of equilibrium payoffs may on the other hand shrink drastically as many efficient outcomes become unsustainable no matter the level of patience. This “antifolk” result occurs when the players prefer stage outcomes to be positively correlated rather than independent across time. Intuitively, such preferences make it inefficient to offset short‐term losses with future gains, while this is needed to ensure that security levels are met on path. We also establish a folk theorem: if security levels are met on path, such play can be sustained in a subgame perfect equilibrium provided that the players are sufficiently patient.
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
https://doi.org/10.3982/ECTA17756
Related works:
Working Paper: Intertemporal Hedging and Trade in Repeated Games with Recursive Utility (2022) 
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:wly:emetrp:v:91:y:2023:i:6:p:2333-2369
Ordering information: This journal article can be ordered from
https://www.economet ... ordering-back-issues
Access Statistics for this article
Econometrica is currently edited by Guido W. Imbens
More articles in Econometrica from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().