Subjective random discounting and intertemporal choice

Youichirou Higashi, Kazuya Hyogo, Norio Takeoka

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

This paper provides an axiomatic foundation for a particular type of preference shock model called the random discounting representation where a decision maker believes that her discount factors change randomly over time. For this purpose, we formulate an infinite horizon extension of [E. Dekel, B. Lipman, A. Rustichini, Representing preferences with a unique subjective state space, Econometrica 69 (2001) 891-934], and identify the behavior that reduces all subjective uncertainties to those about future discount factors. We also show uniqueness of subjective belief about discount factors. Moreover, a behavioral comparison about preference for flexibility characterizes the condition that one's subjective belief second-order stochastically dominates the other. Finally, the resulting model is applied to a consumption-savings problem.

Original languageEnglish
Pages (from-to)1015-1053
Number of pages39
JournalJournal of Economic Theory
Volume144
Issue number3
DOIs
Publication statusPublished - May 2009
Externally publishedYes

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Keywords

  • Preference for flexibility
  • Random discounting
  • Second-order stochastic dominance
  • Subjective states

ASJC Scopus subject areas

  • Economics and Econometrics

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