Working Paper: Restricted Dynamic Consistency


Dynamic consistency is a key behavioral property in dynamic models, enabling tractability by means of dynamic programming methods. However, it is a behavioral property that is often violated in experiments. This paper shows that dynamic consistency can be relaxed to hold over a much smaller domain of consumption programs. Nonetheless, this domain can still be sufficiently rich for practical applications. To illustrate, I provide examples of domains that are rich enough to separate risk aversion from intertemporal substitution. As an application, I introduce a new model of dynamic preferences, the Epstein- Zin-Selden-Stux preferences. These preferences are recursive only within a restricted domain. In contrast with standard recursive preferences, this weaker notion of dynamic consistency allows for indifference to the timing of resolution of uncertainty.

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Lorenzo Maria Stanca
Lorenzo Maria Stanca
Assistant Professor of Economics

Greetings! I hold concurrent appointments as an Assistant Professor at Collegio Carlo Alberto and within the Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) at the University of Turin. My academic focus is centered on economic theory, with a particular emphasis on decision theory.