Dynamic preference for flexibility
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We consider a decision maker who faces dynamic decision situations that involve intertemporal trade-offs, as in consumption-savings problems, and who experiences taste shocks that are transient contingent on the state of the world. We axiomatize a recursive representation of choice over state contingent infinite horizon consumption problems, where uncertainty about consumption utilities depends on the observable state and the state follows a subjective Markov process. The parameters of the representation are the subjective process that governs the evolution of beliefs over consumption utilities and the discount factor; they are uniquely identified from behavior. We characterize a natural notion of greater preference for flexibility in terms of a dilation of beliefs. An important special case of our representation is a recursive version of the Anscombe-Aumann model with parameters that include a subjective Markov process over states and state-dependent utilities, all of which are uniquely identified. © 2014 The Econometric Society.
Published Version (Please cite this version)10.3982/ECTA10072
Publication InfoKrishna, RV; & Sadowski, Philipp (2014). Dynamic preference for flexibility. Econometrica, 82(2). pp. 655-703. 10.3982/ECTA10072. Retrieved from http://hdl.handle.net/10161/13109.
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Associate Professor of Economics
Philipp Sadowski's work focuses on microeconomic theory, decision theory and behavioral economics. A central research interest is to better understand the interaction between observable economic behavior and the often not directly observable formation of beliefs. Topics include subjective learning, rational inattention, changing tastes, and other-regarding motives such as shame and magical thinking. Philipp's research has been published in leading journals, presented internationally, and support