We characterize optimal consumption policies in a recursive intertemporal utility framework with local substitution. We establish existence and uniqueness and a version of the Kuhn-Tucker theorem characterizing the optimal consumption plan. An explicit solution is provided for the case when the...

This paper investigates the optimal design of incentives when agents distort probabilities. We show that the type of probability distortion displayed by the agent and its degree determine whether an incentivecompatible contract can be implemented, the strength of the incentives included in the...

For most of the second half of the 20th century, modern neoclassical finance, and more generally much of social science, has been based on the von Neumann and Morgenstern (VM) (1944) game theory expected utility axioms as a prescription for rational decision making under uncertainty. Traditional...

The Allais Paradox is a central motivation for several prominent extensions of expected utility, including rank-dependent theories and the theory of fanning-out indifference curves. We examine the ability of these theories to explain the Allais common consequence effect. The only extension of...