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Ambiguity, uncertainty aversion and equilibrium welfare

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Author Info
Rose-Anne Dana ()
Abstract

In order to analyse the effect of ambiguity and uncertainty aversion on equilibrium welfare, a two period, pure exchange one good economy is considered. Agents are Choquet-expected-utility maximizers with same convex capacity and strictly concave utility index. It is proven that equilibrium is indeterminate whenever several probabilities in the core of the capacity minimize the expected value of aggregate endowment and not all agents have same expected endowments under those probabilities. It is further shown that small changes in aggregate endowment may have drastic welfare implications. A more general model is considered in the case of no aggregate uncertainty: agents have a set of priors and are uncertainty averse as modelled by Gilboa-Schmeidler [1989]. In the case of complete markets, it is shown that assets have a spread of equilibrium prices similar to the spread of no-arbitrage prices compatible with absence of arbitrage in markets with imperfections. Copyright Springer-Verlag Berlin/Heidelberg 2004

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File URL: http://hdl.handle.net/10.1007/s00199-003-0383-2
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Article provided by Springer in its journal Economic Theory.

Volume (Year): 23 (2004)
Issue (Month): 3 (March)
Pages: 569-587
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Handle: RePEc:spr:joecth:v:23:y:2004:i:3:p:569-587

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Related research
Keywords: Ambiguity Uncertainty aversion Equilibrium welfare Equilibrium pricing.

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  1. Jürgen Eichberger & David Kelsey, 2007. "Ambiguity," Working Papers 0448, University of Heidelberg, Department of Economics, revised Jul 2007. [Downloadable!]
  2. Peter Bossaerts & Serena Guarnaschelli & Paolo Ghirardato & William Zame, 2006. "Ambiguity in Asset Markets: Theory and Experiment," Carlo Alberto Notebooks 27, Collegio Carlo Alberto, revised 2007. [Downloadable!]
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