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Smoothing preference kinks with information

  • Chambers, Robert G.
  • Melkonyan, Tigran

We identify conditions under which receipt of information in the form of a (potentially) ambiguous signal leads to a smoother maximin expected utility (MEU) preference structure which translates behaviorally into a smaller no-trade price zone. Narrowing of the no-trade price zone depends critically on the rectangularity of the belief structure, which, in the context of an MEU model, is a requirement of dynamic consistency in Machina's sense. Another important factor affecting the size of the no-trade price zone is the relative contribution of ambiguity in signals and ambiguity in posterior beliefs to the degree of prior ambiguity over market events.

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Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 58 (2009)
Issue (Month): 2 (September)
Pages: 173-189

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Handle: RePEc:eee:matsoc:v:58:y:2009:i:2:p:173-189
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505565

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