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Ambiguity aversion and trade

Author

Listed:
  • Luciano de Castro

    (Kellogg [Northwestern] - Kellogg School of Management [Northwestern University, Evanston] - Northwestern University [Evanston])

  • Alain Chateauneuf

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, Axe Economie mathématique et jeux - CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

Abstract

What is the effect of ambiguity aversion on trade? Although in a Bewley's model, ambiguity aversion always leads to less trade; in other models, this is not always true. However, we show that if the endowments are unambiguous, then more ambiguity aversion implies less trade for a very general class of preferences. The reduction in trade caused by ambiguity aversion can be as severe as to lead to no trade. In an economy with MEU decision makers, we show that if the aggregate endowment is unanimously unambiguous, then every Pareto optima allocation is also unambiguous. We also characterize the situation in which every unanimously unambiguous allocation is Pareto optimal. Finally, we show how our results can be used to explain the home-bias effect. As a useful result for our methods, we also obtain an additivity theorem for CEU and MEU decision makers that does not require comonotonicity.

Suggested Citation

  • Luciano de Castro & Alain Chateauneuf, 2011. "Ambiguity aversion and trade," PSE-Ecole d'économie de Paris (Postprint) hal-00685408, HAL.
    • Handle: RePEc:hal:pseptp:hal-00685408
    DOI: 10.1007/s00199-011-0642-6
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    Keywords

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    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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