Hidden actions and preferences for timing of resolution of uncertainty

Ergin, Haluk; Sarver, Todd

doi:10.3982/te1340

Cited by 20 publications

(15 citation statements)

References 43 publications

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“…For example, the choice of physical commitments, such as mortgage agreements or purchases of durable consumption goods, impacts risk preferences for future wealth (see Grossman and Laroque (1990), Gabaix and Laibson (2001), Chetty andSzeidl (2007, 2016)). Even more closely related, both conceptually and technically, are Kreps and Porteus (1979), Machina (1984), and Ergin and Sarver (2015), who studied the revealed-preference implications of commitments that are unobservable or psychological in nature. Maccheroni (2002) developed a model of maxmin under risk that had a very different interpretation but also relied on similar techniques.…”

Section: Main Axiom and Representation Resultsmentioning

confidence: 99%

Dynamic Mixture-Averse Preferences

Sarver¹

2018

Econometrica

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IN THIS SUPPLEMENT, we provide several supporting results that are used in the main paper. In Section S.1, we provide a general local expected-utility result for mixture-averse preferences that nests Proposition 1 in the main paper as a special case. In Section S.2, we establish the relationship between mixture-averse preferences and several prominent non-expected-utility theories, including rank-dependent utility, betweenness, disappointment aversion, and cautious expected utility. Section S.3 describes the implications of preference for diversification for insurance demand, and discusses how preference for diversification is equivalent to risk aversion for either rank-dependent utility or any preference that is quasiconcave in probabilities. Section S.4 establishes the existence of a value function for the optimal risk attitude representation. Proofs are contained in Section S.5. S.1. LOCAL EXPECTED-UTILITY ANALYSISWhen applying the optimal risk attitude model, one important consideration is how properties of the set of transformations in the representation relate to properties of the corresponding risk preference. In this section, we show that the certainty equivalent for an ORA representation respects a stochastic order if and only if each of the transformations φ ∈ also respects this order. This result is similar in spirit to the local expected-utility analysis introduced in the influential paper by Machina (1982). After presenting the main theorem of this section, we will make precise connections to Machina's results and the many generalizations and extensions that appeared in the literature that followed. We will also describe how the expected-utility core recently developed by Cerreia-Vioglio, Maccheroni, and Marinacci (2017) can be related to the ORA representation.The main result of this section applies to any convex utility representation on a set of lotteries (X), where X is any compact metric space. Of particular interest is the special case where X is an interval, for example, a set of monetary outcomes or the set of continuation values for an ORA representation. We first state a general definition of stochastic orders generated by sets of functions. DEFINITION S.1: Let C be a set in the space of real-valued continuous functions C(X) for some compact metric space X. The order ≥ C on (X) generated by C is defined by μ ≥ C η ⇐⇒ φ(x) dμ(x) ≥ φ(x) dη(x) ∀φ ∈ C A function W : (X) → R is monotone with respect to the order ≥ C if μ ≥ C η implies W (μ) ≥ W (η).

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Section: Main Axiom and Representation Resultsmentioning

confidence: 99%

Dynamic Mixture-Averse Preferences

Sarver¹

2018

Econometrica

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“…A preference for flexibility distinguishes the information-acquisition problem in a rationally inattentive preference from models where the DM may be "inattentive" to some of the alternatives in a menu (see, e.g., Masatlioglu et al 2012, Manzini and Mariotti 2014, or Ortoleva 2013. 5 Axiom 5 could also be interpreted as expressing a desire for early resolution of uncertainty (Ergin and Sarver 2015). Moreover, Axiom 5 rules out a preference for hedging that, for instance, could arise if the DM today were uncertain about the information-acquisition technology available tomorrow.…”

Section: Axiomsmentioning

confidence: 99%

Rationally inattentive preferences and hidden information costs

Oliveira

Denti²,

Mihm

et al. 2017

Theoretical Economics

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We show how information acquisition costs can be identified using observable choice data. Identifying information costs from behavior is especially relevant when these costs depend on factors-such as time, effort, and cognitive resources-that are difficult to observe directly, as in models of rational inattention. Using willingness-to-pay data for opportunity sets-which require more or less information to make choices-we establish a set of canonical properties that are necessary and sufficient to identify information costs. We also provide an axiomatic characterization of the induced rationally inattentive preferences and show how they reveal the amount of information a decision-maker acquires.Keywords. Information costs, Blackwell order, information acquisition, menu choice, rational inattention. JEL classification. D81, D83. This paper merges our independent works, previously circulated as "Axiomatic Foundations for Rational Inattention" (de Oliveira), "Rational Inattention: A Decision-Theoretic Perspective" (Denti), and "Decision Making with Rational Inattention" (Mihm and Ozbek). We are grateful to Larry Blume, Simone CerreiaVioglio, Eddie Dekel, Fabio Maccheroni, Paola Manzini, Massimo Marinacci, Marco Mariotti, Tapan Mitra, Todd Sarver, and Joerg Stoye for invaluable guidance and support. We also thank Nabil Al-Najjar, Andrew Caplin, Aaron Bodoh-Creed, Giulia Brancaccio, Enrico Cantoni, Mark Dean, David Easley, Ludovica Gazzé, Peter Klibanoff, John Leahy, Samreen Malik, Jawwad Noor, Efe Ok, Pietro Ortoleva, Luciano Pomatto, Debraj Ray, Marciano Siniscalchi, Juuso Toikka, Mirko Wiederholt, Muhamet Yildiz, various seminar and conference participants, the editor and three anonymous reviewers for helpful comments and suggestions.

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“…In a related paper, Ergin and Sarver (2010) studied preferences for the timing of the resolution of objective risk with a different choice domain, equal to lotteries over menus of lotteries over the final outcomes. The preferences they study are von Neumann-Morgenstern (vNM) over the outer layer of lotteries, but the preferences over menus violate strategic rationality; following Kreps (1979) and Dekel, Lipman, and Rustichini (2001), a subjective state space is derived from preferences.…”

Section: Subjective Versus Objective Uncertaintymentioning

confidence: 99%

“…The preferences they study are von Neumann-Morgenstern (vNM) over the outer layer of lotteries, but the preferences over menus violate strategic rationality; following Kreps (1979) and Dekel, Lipman, and Rustichini (2001), a subjective state space is derived from preferences. Ergin and Sarver (2010) associated the preference for later resolution of risk with there being a malevolent nature that is minimizing the agent's expected utility over some set of probabilities, a representation reminiscent of ambiguity aversion. In fact, analogous effects are present in models with an objective state space and two layers of objective risk, like those of Anscombe and Aumann (1963) and, more recently, Seo (2009).…”

Section: Subjective Versus Objective Uncertaintymentioning

confidence: 99%

“…In models with an objective state space, this feature arises because mixing acts ex post provides hedging, which is desired under ambiguity aversion. In the Ergin and Sarver (2010) model, this feature is present even under objective risk, since any given single lottery in their model can be seen as a nondegenerate act with respect to the subjective state space.…”

Section: Subjective Versus Objective Uncertaintymentioning

confidence: 99%

See 1 more Smart Citation

Temporal Resolution of Uncertainty and Recursive Models of Ambiguity Aversion

Strzalecki

2013

Econometrica

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Dynamic models of ambiguity aversion are increasingly popular in applied work. This paper shows that there is a strong interdependence in such models between the ambiguity attitude and the preference for the timing of the resolution of uncertainty, as defined by the classic work of Kreps and Porteus (1978). The modeling choices made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes. The main result is that the only model of ambiguity aversion that exhibits indifference to timing is the maxmin expected utility of Gilboa and Schmeidler (1989). This paper examines the structure of the timing nonindifference implied by the other commonly used models of ambiguity aversion. This paper also characterizes the indifference to long-run risk, a notion introduced by Duffie and Epstein (1992). The interdependence of ambiguity and timing that this paper identifies is of interest both conceptually and practically-especially for economists using these models in applications.

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Hidden actions and preferences for timing of resolution of uncertainty

Cited by 20 publications

References 43 publications

Dynamic Mixture-Averse Preferences

Dynamic Mixture-Averse Preferences

Rationally inattentive preferences and hidden information costs

Temporal Resolution of Uncertainty and Recursive Models of Ambiguity Aversion

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