In this paper we propose a unifying approach to the study of recursive economic problems. Postulating an aggregator function as the fundamental expression of tastes, we explore conditions under which a utility function can be constructed. We also modify the usual dynamic programming arguments to include this class of models. We show that Bellman’s equation still holds, so many results known for...

Recursive utility models that feature investor concerns about the intertemporal composition of risk are used extensively in applied research in macroeconomics and asset pricing. These models represent preferences as the solution to a nonlinear forward-looking difference equation with a terminal condition. In this paper we study infinite-horizon specifications of this difference equation in the ...

Similarly, we can rewrite the incentive constraint as follows: u(ct(s )) + βvt+1(s ) ≥ O(F (kt(s), st)− et(s)). In this section, we conjecture that ct(s ), kt(s t−1), et(s t−1) and vt+1(s ) can be expressed as a function of vt(s t−1), st−1 and st. I derive a recursive version of the problem and then I show that the conjecture is correct: the recursively generated contract is the optimal one. If...

We develop a tractable incomplete-markets model with an earnings process Y subject to permanent shocks and borrowing constraints. Financial frictions cause the marginal (certainty equivalent) value of wealth W to be greater than unity and decrease with liquidity w = W/Y . Additionally, financial frictions cause consumption to decrease with this endogenously determined marginal value of liquidit...

Evidence from both the lab and eld suggest that the presence of background risk increases a decision-maker's risk aversion. Evidence from the lab suggests that behaviour deviates from expected utility, however, existing analyses of non-expected utility theories suggest many such theories cannot accommodate both ndings. Additionally motivated by evidence that people fail to reduce compound lotte...

In a market with stochastic investment opportunities, we study an optimal consumption investment problem for an agent with recursive utility of Epstein-Zin type. Focusing on the empirically relevant specification where both risk aversion and elasticity of intertemporal substitution are in excess of one, we characterize optimal consumption and investment strategies via backward stochastic differ...

We introduce a new class of preferences — which we call additive-belief-based (ABB) utility — that captures a general, but still tractable, approach to belief-based utility, and that encompasses many popular models in the behavioral literature. We axiomatize a general class of ABB preferences, as well as two prominent special cases that allow utility to depend on the level of each period’s beli...

We use the Itô-Ventzell formula for forward integrals and Malliavin calculus to study the stochastic control problem associated to utility indifference pricing in a market driven by Lévy processes. This approach allows us to consider general possibly non-Markovian systems, general utility functions and possibly partial information based portfolios. In the special case of the exponential utility...

This paper connects robust control theory to the max-min expected utility model of uncertainty aversion. Max-min expected utility theory depicts preferences using multiple prior distributions. Robust control theory regards a unique controlled stochastic process as an approximation by introducing a set of perturbations to it. We link the two approaches by interpreting the perturbations in robust...