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Equilibria Under Knightian Price Uncertainty

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  • Beissner, Patrick

    (ANU)

  • Riedel, Frank

    (IMW Bielefeld University)

Abstract

We study economies in which agents face Knightian uncertainty about state prices. Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to Pareto inefficient allocations; the equilibria coincide with Arrow-Debreu equilibria only if the values of net trades are ambiguity-free in the mean. In economies without aggregate uncertainty, inefficiencies are generic. We introduce a constrained efficiency concept, uncertainty-neutral efficiency, equilibrium allocations under price uncertainty are efficient in this constrained sense. Arrow-Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty.

Suggested Citation

  • Beissner, Patrick & Riedel, Frank, 2019. "Equilibria Under Knightian Price Uncertainty," Rationality and Competition Discussion Paper Series 142, CRC TRR 190 Rationality and Competition.
  • Handle: RePEc:rco:dpaper:142
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    Cited by:

    1. Matteo Burzoni & Marco Maggis, 2019. "Arbitrage-free modeling under Knightian Uncertainty," Papers 1909.04602, arXiv.org.
    2. Antoine Billot & Jean-Marc Tallon & Sujoy Mukerji, 2019. "Market Allocations under Ambiguity: A Survey," PSE Working Papers halshs-02173491, HAL.

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