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Ambiguity Aversion in the Long Run: "To Disagree, We Must Also Agree"

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  • Aloisio Araujo
  • Pietro da Silva
  • José Heleno Faro

Abstract

We consider an economy populated by smooth ambiguity-averse agents with complete markets of securities contingent to economic scenarios, where bankruptcy is permitted but there is a penalty for it. We show that if agentsí posterior belief reductions given by their ìaverage proba bilistic beliefs" do not become homogeneous then an equilibrium does not exist. It is worth noting that our main result does not imply any conver gence of ambiguity perception or even the attitudes towards it. In this way, complete markets with default and punishment allows for ambiguity aversion in the long run, and the agents can disagree on their ambiguity perception but they must agree on their expected beliefs.

Suggested Citation

  • Aloisio Araujo & Pietro da Silva & José Heleno Faro, 2015. "Ambiguity Aversion in the Long Run: "To Disagree, We Must Also Agree"," Business and Economics Working Papers 222, Unidade de Negocios e Economia, Insper.
    • Handle: RePEc:aap:wpaper:222
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    Cited by:

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    3. Victor Filipe Martins da Rocha & Rafael Mouallem Rosa, 2023. "Complete Markets with Bankruptcy Risk and Pecuniary Default Penalties," Post-Print hal-02921220, HAL.
    4. Shi, Baofeng & Zhao, Xue & Wu, Bi & Dong, Yizhe, 2019. "Credit rating and microfinance lending decisions based on loss given default (LGD)," Finance Research Letters, Elsevier, vol. 30(C), pages 124-129.

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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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