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<p>Dynamic consistency is a key behavioral property in dynamic economic models, making it possible to use tractable dynamic programming techniques. However, when combined with the separation of time and risk preferences, it can lead to unrealistic predictions that contradict empirical evidence. This paper demonstrates that dynamic consistency can be relaxed to hold over a much smaller domain of consumption programs while maintaining sufficient richness for practical applications and allowing the separation of 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. Recent experimental results by Meissner and Pfeiffer (J Econ Theory 200:105379, 2022), which Epstein–Zin preferences cannot rationalize, find a natural explanation through this new model. Finally, I consider an application of this new model to a consumption-investment problem.</p>

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Restricted dynamic consistency

  • 期刊论文

  • 发表日期：

    2025年5月21日

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  • Lorenzo Stanca

摘要

Dynamic consistency is a key behavioral property in dynamic economic models, making it possible to use tractable dynamic programming techniques. However, when combined with the separation of time and risk preferences, it can lead to unrealistic predictions that contradict empirical evidence. This paper demonstrates that dynamic consistency can be relaxed to hold over a much smaller domain of consumption programs while maintaining sufficient richness for practical applications and allowing the separation of 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. Recent experimental results by Meissner and Pfeiffer (J Econ Theory 200:105379, 2022), which Epstein–Zin preferences cannot rationalize, find a natural explanation through this new model. Finally, I consider an application of this new model to a consumption-investment problem.