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Net worth trap under ambiguity

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  • Shi, Bangru
  • Wu, Yaoyao
  • Zhao, Siqi

Abstract

We develop a macro model with financial frictions where high-productivity farmers must rent land and face ambiguity about production. Ambiguity makes land demand state dependent: it is pro-cyclical when farmers fear low expected returns and counter-cyclical when they anticipate higher future rental costs. Pro-cyclical demand compresses production in downturns and yields competing effects on the net-worth trap. With moderate ambiguity aversion, farmers cut land use, lowering endogenous risk and avoiding the trap. With strong aversion, it slows net-worth rebuilding, leading to sluggish recoveries and economic vulnerability.

Suggested Citation

  • Shi, Bangru & Wu, Yaoyao & Zhao, Siqi, 2026. "Net worth trap under ambiguity," Economics Letters, Elsevier, vol. 267(C).
    • Handle: RePEc:eee:ecolet:v:267:y:2026:i:c:s0165176526002867
    DOI: 10.1016/j.econlet.2026.113092
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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G01 - Financial Economics - - General - - - Financial Crises

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