In this dissertation I study the role recursive preferences due to Epstein and Zin (1989) play in macroeconomics and asset pricing. First I combine recursive preferences with long-run productivity growth risk and study the implications for asset pricing. Second, I focus on the preference for the timing of resolution of uncertainty that arises when one uses Epstein-Zin recursive utility, and the interaction of such preference with incentives to invest into technology that could cause uncertainty to be realized early.
In the first part of this dissertation I setup a monetary production economy with capital accumulation and recursive preferences and evaluate model's implications for pricing of equity and nominal default-free bonds. Plausibly parameterized model generates equity premium of about 1%, large and positive nominal bond term premium. Equity and nominal bond excess returns are forecastable, but considerably less so than in the data. Model generates large inflation premium, that is fairly sensitive to the parameters of interest rate rule.
In the second part I investigate the interaction between government policy and incentives to invest in risk-control technology in a heterogenous preference setting. Empirical studies show that intertemporal elasticity of substitution varies a great deal within population. I setup a stylized model where such heterogeneity leads to difference in preference for the timing of the resolution of uncertainty. The uncertainty in the model is about the future productivity of a risky technology. Investors can choose to observe an early signal about their individual future productivity (hence shifting the resolution of uncertainty to the earlier date) and cut exposure in case of a bad signal via conversion of a part of risky technology investment into safe investment. Government in the model has the power to influence the cost of borrowing and the return of the safe investment. I show that government policy has important implications both for the individual choice of whether to observe a signal about future productivity and for the aggregate output.