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Equilibrium control theory for Kihlstrom-Mirman preferences in continuous time

Author

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  • Luca De Gennaro Aquino
  • Sascha Desmettre
  • Yevhen Havrylenko
  • Mogens Steffensen

Abstract

In intertemporal settings, the multiattribute utility theory of Kihlstrom and Mirman suggests the application of a concave transform of the lifetime utility index. This construction, while allowing time and risk attitudes to be separated, leads to dynamically inconsistent preferences. We address this issue in a game-theoretic sense by formalizing an equilibrium control theory for continuous-time Markov processes. In these terms, we describe the equilibrium strategy and value function as the solution of an extended Hamilton-Jacobi-Bellman system of partial differential equations. We verify that (the solution of) this system is a sufficient condition for an equilibrium and examine some of its novel features. A consumption-investment problem for an agent with CRRA-CES utility showcases our approach.

Suggested Citation

  • Luca De Gennaro Aquino & Sascha Desmettre & Yevhen Havrylenko & Mogens Steffensen, 2024. "Equilibrium control theory for Kihlstrom-Mirman preferences in continuous time," Papers 2407.16525, arXiv.org.
    • Handle: RePEc:arx:papers:2407.16525
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    File URL: http://arxiv.org/pdf/2407.16525
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