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Equilibria Under Knightian Price Uncertainty

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  • Patrick Beissner
  • Frank Riedel

Abstract

We study economies with Knightian uncertainty about state prices. We introduce an equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to inefficient allocations; they coincide with Arrow–Debreu equilibria if and only if the values of net trades are ambiguity‐free in mean. In economies without aggregate uncertainty, inefficiencies are generic. Equilibrium allocations under price uncertainty are efficient in a constrained sense that we call uncertainty–neutral efficient. Arrow–Debreu equilibria turn out to be non‐robust with respect to the introduction of Knightian uncertainty.

Suggested Citation

  • Patrick Beissner & Frank Riedel, 2019. "Equilibria Under Knightian Price Uncertainty," Econometrica, Econometric Society, vol. 87(1), pages 37-64, January.
  • Handle: RePEc:wly:emetrp:v:87:y:2019:i:1:p:37-64
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    File URL: https://doi.org/10.3982/ECTA14934
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    1. Patrick Beissner & Frank Riedel, 2014. "Non-Implementability of Arrow-Debreu Equilibria by Continuous Trading under Knightian Uncertainty," Papers 1409.6940, arXiv.org.
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    Cited by:

    1. Matteo Burzoni & Marco Maggis, 2019. "Arbitrage-free modeling under Knightian Uncertainty," Papers 1909.04602, arXiv.org.
    2. repec:gam:jrisks:v:7:y:2019:i:3:p:98-:d:267950 is not listed on IDEAS
    3. Antoine Billot & Sujoy Mukerji & Jean-Marc Tallon, 2019. "Market Allocations under Ambiguity: A Survey," Working Papers 897, Queen Mary University of London, School of Economics and Finance.

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