This chapter 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 Dekel, Lipman, and Rustichini (Econometrica 69:891–934, 2001), 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.
- Preference for flexibility
- Random discounting
- Subjective states
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
- Business, Management and Accounting(all)