Ambiguity aversion and the absence of indexed debt
AbstractFollowing the seminal works of Schmeidler (1989), Gilboa and Schmeidler (1989), roughly put, an agent’s subjective beliefs are said to be ambiguous if the beliefs may not be represented by a unique probability distribution, in the standard Bayesian fashion, but instead by a set of probabilities. An ambiguity averse decision maker evaluates an act by the minimum expected value that may be associated with it. In spite of wide and long-standing support among economists for indexation of loan contracts there has been relatively little use of indexation, except in situations of extremely high inflation. The object of this paper is to provide a (theoretical) explanation for this puzzling phenomenon based on the hypothesis that economic agents are ambiguity averse. The paper considers a general equilibrium model based on Magill and Quinzii (1997) with ambiguity averse agents, where both nominal and indexed bond contracts are available for trade and all relevant prices are determined endogenously. We obtain conditions which prompt an endogenous cessation of trade in indexed bonds: i.e., conditions under which there is no trade in indexed bonds in any equilibrium; only nominal bonds are traded. Copyright Springer-Verlag Berlin/Heidelberg 2004
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 24 (2004)
Issue (Month): 3 (October)
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Other versions of this item:
- Mokerji, S. & Tallon, J.M., 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Papiers d'Economie MathÃÂ©matique et Applications 2000.53, UniversitÃ© PanthÃ©on-Sorbonne (Paris 1).
- Mukerji, S. & Tallon, J.-M., 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Economics Series Working Papers 9928, University of Oxford, Department of Economics.
- Sujoy Mukerji & Jean-Marc Tallon, 2000. "Ambiguity Aversion and the Absence of Indexed Debt," Economics Series Working Papers 28, University of Oxford, Department of Economics.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
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