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Intertemporal Equilibria with Knightian Uncertainty

  • Rose-Anne Dana

    (CEREMADE, UMR CNRS 7534, Université Paris IX Dauphine)

  • Frank Riedel

    ()

    (Institute of Mathematical Economics, Bielefeld University)

We study a dynamic and infinite-dimensional model with Knightian uncertainty modeled by incomplete multiple prior preferences. In interior efficient allocations, agents share a common risk-adjusted prior and use the same subjective interest rate. Interior efficient allocations and equilibria coincide with those of economies with subjective expected utility and priors from the agents' multiple prior sets. We show that the set of equilibria with inertia contains the equilibria of the economy with variational preferences anchored at the initial endowments. A case study in an economy without aggregate uncertainty shows that risk is fully insured, while uncertainty can remain fully uninsured. Pessimistic agents with Gilboa-Schmeidler's max-min preferences would fully insure risk and uncertainty.

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File URL: http://www.imw.uni-bielefeld.de/papers/files/imw-wp-440.pdf
File Function: First version, 2010
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Paper provided by Center for Mathematical Economics, Bielefeld University in its series Center for Mathematical Economics Working Papers with number 440.

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Length: 30 pages
Date of creation: Sep 2010
Date of revision:
Handle: RePEc:bie:wpaper:440
Contact details of provider: Postal: Postfach 10 01 31, 33501 Bielefeld
Phone: +49(0)521-106-4907
Web page: http://www.imw.uni-bielefeld.de/

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  1. Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
  2. Antoine Billot & Alain Chateauneuf & Itzhak Gilboa & Jean-Marc Tallon, 2000. "Sharing Beliefs: Between Agreeing and Disagreeing," Econometrica, Econometric Society, vol. 68(3), pages 685-694, May.
  3. Rigotti, Luca & Shannon, Chris, 2001. "Uncertainty and Risk in Financial Markets," Department of Economics, Working Paper Series qt7pp7113z, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006. "Ambiguity Aversion, Robustness, and the Variational Representation of Preferences," Econometrica, Econometric Society, vol. 74(6), pages 1447-1498, November.
  5. Dana, Rose-Anne, 2002. "On Equilibria when Agents Have Multiple Priors," Economics Papers from University Paris Dauphine 123456789/5456, Paris Dauphine University.
  6. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
  7. Frank Riedel, 2009. "Optimal Stopping With Multiple Priors," Econometrica, Econometric Society, vol. 77(3), pages 857-908, 05.
  8. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
  9. Easley, David & O'Hara, Maureen, 2010. "Liquidity and valuation in an uncertain world," Journal of Financial Economics, Elsevier, vol. 97(1), pages 1-11, July.
  10. Itzhak Gilboa & Fabio Maccheroni & Massimo Marinacci & David Schmeidler, 2010. "Objective and Subjective Rationality in a Multiple Prior Model," Econometrica, Econometric Society, vol. 78(2), pages 755-770, 03.
  11. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  12. Alain Chateauneuf & Rose Anne Dana & Jean-Marc Tallon, 2000. "Optimal risk-sharing rules and equilibria with Choquet-expected-utility," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00451997, HAL.
  13. Shannon, Chris & Strzalecki, Tomasz & Rigotti, Luca, 2008. "Subjective Beliefs and Ex Ante Trade," Scholarly Articles 3637104, Harvard University Department of Economics.
  14. Nascimento, Leandro & Riella, Gil, 2011. "A class of incomplete and ambiguity averse preferences," Journal of Economic Theory, Elsevier, vol. 146(2), pages 728-750, March.
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  16. Epstein, Larry G. & Marinacci, Massimo, 2007. "Mutual absolute continuity of multiple priors," Journal of Economic Theory, Elsevier, vol. 137(1), pages 716-720, November.
  17. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
  18. Nehring, Klaus, 2009. "Imprecise probabilistic beliefs as a context for decision-making under ambiguity," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1054-1091, May.
  19. repec:hal:journl:halshs-00174553 is not listed on IDEAS
  20. Efe A. Ok & Pietro Ortoleva & Gil Riella, 2012. "Incomplete Preferences Under Uncertainty: Indecisiveness in Beliefs versus Tastes," Econometrica, Econometric Society, vol. 80(4), pages 1791-1808, 07.
  21. Faro, José Heleno, 2011. "Variational Bewley Preferences," Insper Working Papers wpe_258, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  22. Gale, D. & Mas-Colell, A., 1975. "An equilibrium existence theorem for a general model without ordered preferences," Journal of Mathematical Economics, Elsevier, vol. 2(1), pages 9-15, March.
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