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Klaus Nehring

Department of Economics from California Davis - Department of Economics

Abstract: In this paper, we study preferences over Savage acts that map states to opportunity sets. Conditional preferences over opportunity sets may be inconsistent with indirect-utility maximization due to implicit uncertainty about future preferences (preference for flexibility), or to an intrinsic preference for freedom of choice. On a flexibility interpretation, the main result characterizes preferences based on maximizing the expected indirect utility in terms of an "Indirect Stochastic Dominance" axiom. The relevance of the result to a freedom-of-choice context is established on the basis of a novel multi-attribute conceptualization of the notion of effective freedom of choice; the theorem delivers an additive multi-attribute representation with optimal uniqueness properties. The key technical tool of the paper, a version of M bius inversion has been imported from the theory of (non-additive) "belief-functions;" it also yields a simple and intuitive proof of Kreps's (1979) classic result.

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