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Elements of economics of uncertainty and time with recursive utility

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  • Aase, Knut K.

    (Dept. of Business and Management Science, Norwegian School of Economics)

Abstract

We address how recursive utility affects important results in the theory of economics of uncertainty and time, as compared to the standard model, where the focus is on dynamic models in discrete time. Several puzzles associated with the standard theory are less puzzling with recursive utility, even if this type of preference representation seems close to the standard one at first sight. An inconsistency with the axioms behind the standard, separable and additive expected utility representation is pointed out and extended to also be relevant for recursive utility. The basic difference from the standard model is that recursive utility allows a form of separation of consumption substitution from risk aversion. This also means that the timing of resolution of uncertainty matters. In dynamic models, however, this turns out to be a rather crucial step.

Suggested Citation

  • Aase, Knut K., 2020. "Elements of economics of uncertainty and time with recursive utility," Discussion Papers 2020/13, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2020_013
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    File URL: https://hdl.handle.net/11250/2686569
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    References listed on IDEAS

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    More about this item

    Keywords

    Recursive utility; axioms; scale invariance; utility gradients; the equity premium puzzle; precautionary savings;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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