Please use this identifier to cite or link to this item: http://hdl.handle.net/1783.1/792

A model of intertemporal preferences with application in agency theory

Authors Wathieu, Luc
Issue Date 1994-12
Summary This paper introduces a model of intertemporal preferences where the decision maker evaluates outcomes in terms of gains and losses, in comparison with what (s)he has been accustomed to in the past. More specifically, we examine the properties of a discounted utility model where utility exhibits reference-dependence and loss aversion, and where the reference point follows a single exponential smoothing process. The model predicts and explains the most common anomalies with respect to classical discounted utility theory. Properties are given in terms of impatience, dynamic consistency, and attitude towards variations. In order to demonstrate the potential of the model, we apply it to the study of an agent's participation in a multi-period relationship. We show that initial participation may require a commitment from the principal regarding future contracts. This leads us to a brief discussion about wage profiles across time and other related subjects.
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Language English
Format Working paper
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