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Ambiguity Aversion and Absence of Trade

Author Info

Listed author(s):
  • Alain Chateauneuf
  • Luciano De Castro

Abstract

What is the effect of ambiguity aversion on trade? Although in a Bewley's model ambiguity aversion always lead 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 JEL Code: D51, D6, D8

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1535.

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Date of creation: 01 Apr 2011
Handle: RePEc:nwu:cmsems:1535
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Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014

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Keywords: no-trade results; ambiguity aversion; Pareto optimality.;

Find related papers by 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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Cited by:

  1. Yehuda Izhakian & Zur Izhakian, 2015. "Decision making in phantom spaces," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(1), pages 59-98, January.
  2. Tamini, Lota Dabio, 2012. "Optimal quality choice under uncertainty on market development," Working Papers 148589, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  3. José Faro, 2013. "Cobb-Douglas preferences under uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(2), pages 273-285, October.
  4. Michele Lombardi & Naoki Yoshihara, 2013. "A full characterization of nash implementation with strategy space reduction," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 131-151, September.
  5. Christian Gollier, 2014. "Optimal insurance design of ambiguous risks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(3), pages 555-576, November.
  6. M. Peiris & Alexandros Vardoulakis, 2013. "Savings and default," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 153-180, September.
  7. Angelos Angelopoulos & Leonidas Koutsougeras, 2015. "Value allocation under ambiguity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 59(1), pages 147-167, May.
  8. Tamini, Lota D., 2012. "Optimal quality choice under uncertainty on market development," MPRA Paper 40845, University Library of Munich, Germany.
  9. Tatjana Chudjakow & Frank Riedel, 2013. "The best choice problem under ambiguity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(1), pages 77-97, September.
  10. Beißner, Patrick, 2016. "Radner Equilibria under Ambiguous Volatility," Center for Mathematical Economics Working Papers 493, Center for Mathematical Economics, Bielefeld University.

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