Linked Recursive Preferences and Optimality

Mathematical Finance, Forthcoming

36 Pages Posted: 16 May 2013

See all articles by Shlomo Levental

Shlomo Levental

Michigan State University

Mark D. Schroder

Michigan State University - The Eli Broad Graduate School of Management

Sumit Sinha

Michigan State University

Multiple version iconThere are 2 versions of this paper

Date Written: March 29, 2013

Abstract

We study a class of optimization problems involving linked recursive preferences in a continuous-time Brownian setting. Such links can arise when preferences depend directly on the level or volatility of wealth, in principal-agent (optimal compensation) problems with moral hazard, and when the impact of social influences on preferences is modeled via utility (and utility diffusion) externalities. We characterize the necessary first-order conditions, which are also sufficient under additional conditions ensuring concavity. We also examine applications to optimal consumption and portfolio choice, and applications to Pareto optimal allocations.

Keywords: recursive preferences, BSDE, portfolio selection, Jones, behavioral contract theory

JEL Classification: C00, C61, D61, D91, G11, M52

Suggested Citation

Levental, Shlomo and Schroder, Mark D. and Sinha, Sumit, Linked Recursive Preferences and Optimality (March 29, 2013). Mathematical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2265622

Shlomo Levental

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

Mark D. Schroder (Contact Author)

Michigan State University - The Eli Broad Graduate School of Management ( email )

323 Eppley Center
East Lansing, MI 48824-1121
United States
517-432-0622 (Phone)
517-432-1080 (Fax)

Sumit Sinha

Michigan State University ( email )

Agriculture Hall
East Lansing, MI 48824-1122
United States

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