This award funds research on the economic theory of human decision-making. The first part of this project will address common everyday situations where individuals make choices repeatedly over time. In many of these cases, people's preferences over various goods may change from day to day. In other words, their preferences are stochastic. This research will propose a new theoretical model to help us understand how these stochastic preferences affect choice behavior. In particular, people's preferences to consume earlier or later would be an important factor. The second part of this project will study the welfare implications of stochastic preferences. When preferences change over time, it is unclear whether policy interventions would be beneficial and help improve individual well-being. This research will provide new tools and methodologies that will inform public policy for stochastic preferences. In general, results from this project will ultimately aid researchers in developing new insights for businesses, government agencies and other institutions that will benefit the U.S. public.
This research will study the dynamics of stochastic intertemporal preferences. Existing models in the stochastic choice literature have mostly taken probabilistic choice frequencies as given without explicitly modeling repetition. The first part of this project will provide a repeated choice foundation for stochastic choice. The aim will be to formalize repetition and develop a tractable (i.e., recursive) model of stochastic intertemporal preferences. Existing standard models assume agents are expected utility maximizers and have standard (i.e. additive time-separable) intertemporal preferences. However, many experimental studies suggest that these standard models are too restrictive to accurately describe true human preferences. This research will take this into account and allow for more general intertemporal preferences such as Epstein-Zin (1989). From the perspective of inference and estimation, this will be crucial as not taking into account the intertemporal structure of the dynamic problem will lead to biased estimates of agents? preferences. The second part of this project will study dynamic consistency and stationarity in the context of stochastic choice. Research on this has been limited partly due to the difficulty of modeling such concepts for stochastic preferences. For instance, a natural extension of stationarity to stochastic choice would always be violated whenever preferences are stochastic. This is important because traditional violations of stationarity have been viewed as instances of dynamic inconsistency and grounds for policy interventions. New definitions and characterizations of dynamic consistency and stationarity for stochastic choice are needed as imprecise definitions would lead to policy interventions that may be counter-productive or welfare-decreasing for agents
This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.
