NEW Working Paper: Recursive Preferences and Ambiguity Attitudes

Abstract

Monotonicity and recursivity are central assumptions in intertemporal consumption problems under ambiguity. We show that monotone recursive preferences admit both a recursive and an ex-ante representation, and that the certainty equivalent functionals associated with these representations are translation invariant. Translation invariance implies that the decision maker’s ambiguity attitudes are constant, in the sense that they do not vary with the level of welfare or utility. Finally, we establish an equation linking the two certainty equivalent functionals that extends the notion of rectangularity for recursive multiple priors, which we call generalized rectangularity. This equation yields a simple, testable condition for dynamic consistency.