Ambiguity Aversion and the Absence of Indexed Debt
AbstractIf agent`s (subjective) beliefs are ambiguous then the beliefs may not be represented by a unique probability distribution in the standard Bayesian fashion but instead by a set of probabilities. Roughly put, an ambiguity averse decision maker evaluates an act by the minimum expected value that may be associated with it. Inspite 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 present paper considers a competitive general equilibrium model of goods, money and bond markets populated by agents with Choquet expected utility preferences, where both nominal and indexed bonds are available for trade and prices of all goods and bonds are determined endogenously. We obtain conditions which promote 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.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 28.
Date of creation: 01 Oct 2000
Date of revision:
Choquet expected utility; ambiguity aversion; Knightian uncertainty; contracts; indexed bonds; indexation;
Other versions of this item:
- Sujoy Mukerji & Jean-Marc Tallon, 2004. "Ambiguity aversion and the absence of indexed debt," Economic Theory, Springer, vol. 24(3), pages 665-685, October.
- 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.
- 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).
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
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