| Introduction and overview: |
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ARE Departmental Seminar on Friday 7th of September, 12:10pm
(not necessary to take the lecture, but helpful and recommended) |
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| Start of regular lecture:
Wednesday, 12th of September |
| Meets:
Lecture ended
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| Content: |
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In the standard model of intertemporal choice, utility is additive over time and over risk. As a consequence, agents have the same propensity to smooth consumption over time as they have to 'smooth consumption over risk states'.
In the lecture, we combine the von Neumann & Morgenstern (1944) axioms with additive separability on certain consumption paths. We find that these assumptions imply a significantly more general model than the (time and uncertainty additive) standard model. In the generalized framework, we introduce a new notion of (multi-commodity) risk aversion that is independent of the good under observation and its measure scale.
Epstein & Zin (1989,1991) have introduced a widespread (recursive) one commodity model that allows to disentangle Arrow-Pratt risk aversion from intertemporal substitutability. We discuss the relation of their (isoelastic) model to the general mulit-commodity framework. We also look at a simpler, non-recursive model that is able to disentangle the two characteristics of choice. We relate the introduced notion of risk aversion to Kreps & Porteus' (1978) preference for the timing of risk resolution and analyze its relation to discounting.
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| Structure: 4+4 lectures with a one week break inbetween
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1 | Atemporal Uncertainty Revisited | |
2 | A Simplified 2 Period Model | |
3 | Epstein Zin and Measure Scale Dependence | |
4 | Intertemporal Risk Aversion | |
5 | The General Model | |
6 | The Isoelastic Model | |
7 | A Preference for the Timing of Risk Resolution | |
8 | Stationarity and Discounting |
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The first 4 lectures introduce the disentanglement of Arrow Pratt risk aversion and intertemporal substitutability and the concept of intertemporal risk aversion in a simplied two period framework. The general model will be discussed in lecture 5 and is based on the paper | |
Wouldn't it be Nice to Know Whether Robinson is Risk Averse?
Lectures 6-8 analyze reasonable axiomatic simplifications of the general setting that lead to more tractable model structures.
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| Material:
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