the effect of ambiguity aversion on insurance and self protection in this article we derive a set of simple conditions such that ambiguity aversion always raises the demand for self insurance and the insurance coverage but decreases the demand for self protection we also characterise the optimal insurance design under ambiguity aversion and exhibit a case in which the straight deductible contract is optimal as in the expected utility model

on the conditions for precautionary saving abstract this paper shows that if the signs of the first three derivatives of the utility function are assumed to be invariant in the consumption level then nonsatiation and risk aversion are sufficient conditions for the presence of precautionary saving moreover a similar set of assumptions ensures that the necessary conditions for decreasing absolute risk aversion and for decreasing absolute prudence are automatically satisfied journal of economic literature classification numbers d11 e21

proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

new results on the relationship among risk aversion prudence and temperance abstract this note studies the relationships between different aspects of agent s preferences toward risk we show that under the assumptions of non satiation and bounded marginal utility prudence implies risk aversion imprudence implies risk loving and that temperance implies prudence intemperance implies imprudence the implications of these results for comparing risks in the cases of increase in risk increase in downside risk and increase in outer risk are discussed

a note on comparative downside risk aversion abstract we provide comparative global conditions for downside risk aversion which are similar to the ones studied by ross for risk aversion we define a coefficient of downside risk aversion and study its local properties

interregional redistribution and budget institutions under asymmetric information empirical evidence from the u s and the european union suggests that regions which contribute to interregional redistribution face weaker borrowing constraints than regions which benefit from interregional redistribution this paper presents an argument in favor of such differentiated budget institutions it develops a two period model of a federation consisting of two types of regions the federal government redistributes from one type of regions contributors to the other type recipients it is shown that a fiscal constitution with lax budget rules for contributors and strict budget rules for recipients solves the self selection problem the federal government faces in the presence of asymmetric information regarding exogenous characteristics of the regions

scientific ambiguity and climate policy economic evaluation of climate policy traditionally treats uncertainty by appealing to expected utility theory yet our knowledge of the impacts of climate policy may not be of sufficient quality to be described by unique probabilistic beliefs in such circumstances it has been argued that the axioms of expected utility theory may not be the correct standard of rationality by contrast several axiomatic frameworks have recently been proposed that account for ambiguous knowledge in this paper we apply static and dynamic versions of a smooth ambiguity model to climate mitigation policy we obtain a general result on the comparative statics of optimal abatement and ambiguity aversion and then extend our analysis to a more realistic dynamic setting where we introduce scientific ambiguity into the well known dice model of the climate economy system for policy relevant exogenous mitigation policies we show that the value of emissions abatement increases as ambiguity aversion increases and that this ambiguity premium can in some plausible cases be very large in these cases the effect of ambiguity aversion on welfare is comparable to that of other much studied welfare parameters thus ambiguity aversion may be an important neglected aspect of climate change economics and seems likely to provide another argument for strong abatement policy

recursive non expected utility connecting ambiguity attitudes to risk preferences and the level of ambiguity abstract i study how risk preferences and the level of ambiguity influence ambiguity attitudes in uzi segal s recursive second order non expected utility model it is shown that the negative certainty independence axiom for risk preferences is equivalent to a global form of ambiguity aversion that entails ambiguity averse behavior irrespective of the state space and the decision maker s second order belief thus the second order version of the cautious expected utility model is the only subclass of segal s theory that robustly predicts ambiguity aversion moreover a mean preserving spread operation over second order beliefs which corresponds to a particular way of increasing the level of ambiguity is equivalent to increasing the relative strength of ambiguity aversion for each possible specification of risk preferences within the cautious expected utility model an application of the latter result establishes a negative relation between participation rates in an asset market and the level of ambiguity concerning the distribution of returns

new results on precautionary saving under two risks this paper identifies a new sufficient condition for a prudent agent to have positive precautionary saving in the presence of labor income and interest rate risks of any size we also provide three economic interpretations for this condition focusing respectively on the marginal effect of saving on total income variance on the sign of the covariance between total income and the return of saving and on the effect of saving on the utility premium

attitudes to risk and attitudes to uncertainty experimental evidence in a series of experiments the interactions among individual attitudes towards risk and uncertainty the sign of the outcome domain and the way uncertainty is represented are tested this is done in a unified framework eliciting individual values by means of a second price auction results confirm the presence of the well known fourfold pattern of risk attitude risk aversion for gains and risk seeking for losses at high probability and risk seeking for gains and risk aversion for losses at low probability and show that this pattern can also be extended to uncertainty in the valuation of losses the modal pattern is decreasing risk and uncertainty aversion as the probability of loss increases while increasing risk and uncertainty aversion is observed for gains moreover it is found that the size of reaction to uncertainty does not depend on the outcome domain and that it persists in the face of an incentive compatible mechanism to elicit preferences

the psychic distance paradox companies tend to begin their internationalization process in countries that are psychically close researchers describe the sequence of entry that firms follow and the mode of entry they choose they suggest that psychically close countries are more easily understood than distant ones and offer more familiar operating environments although not prescriptive an unstated conclusion can be drawn linking sequence of entry to performance evidence from thirty two canadian retail companies shows that only seven 22 were functioning successfully in the united states the psychic distance paradox is that operations in psychically close countries are not necessarily easy to manage because assumptions of similarity can prevent executives from learning about critical differences moreover empirical evidence from 271 ceos confirms greater cultural differences between canada and the u s than assumed previously modifications are suggested to improve the psychic distance concept

do you trust your insurer ambiguity about contract nonperformance and optimal insurance demand abstract we study optimal insurance demand for a risk and ambiguity averse consumer under ambiguity about contract nonperformance ambiguity aversion lowers optimal insurance demand and the consumer s degree of ambiguity aversion is negatively associated with the optimal level of coverage a more pessimistic belief and greater ambiguity may increase or decrease the optimal demand for insurance and we determine sufficient conditions for a negative effect we also discuss wealth effects and evaluate the robustness of our results by considering several alternative models of ambiguity aversion our findings show how ambiguity about contract nonperformance can undermine the functioning of insurance markets making it a concern for regulators caution is required though because demand reactions are only imperfectly informative about the welfare effects of ambiguity about contract nonperformance

ambiguity aversion is not universal assuming universal ambiguity aversion an extensive theoretical literature studies how ambiguity can account for market anomalies from the perspective of expected utility based theories we provide a systematic experimental assessment of ambiguity attitudes in different likelihood ranges and in the gain domain the loss domain and with mixed outcomes we draw on a unified framework to elicit preferences across these domains we replicate the usual finding of ambiguity aversion for moderate likelihood gains however when introducing losses or lower likelihoods we observe predominantly ambiguity neutrality or seeking rejecting universal ambiguity aversion

cautious expected utility and the certainty effect many violations of the independence axiom of expected utility can be traced to subjects attraction to risk free prospects the key axiom in this paper negative certainty independence dillenberger 2010 formalizes this tendency our main result is a utility representation of all preferences over monetary lotteries that satisfy negative certainty independence together with basic rationality postulates such preferences can be represented as if the agent were unsure of how to evaluate a given lottery p instead she has in mind a set of possible utility functions over outcomes and displays a cautious behavior she computes the certainty equivalent of p with respect to each possible function in the set and picks the smallest one the set of utilities is unique in a well dened sense we show that our representation can also be derived from a cautious completion of an incomplete preference relation

company tax reform with a water s edge this paper analyzes the effects of switching from a corporate tax system based on separate accounting sa towards a system in which two countries form a formula apportionment fa union while a third country sticks to sa water s edge our analysis draws a positive picture on the water s edge regulation in the short run for given tax rates the transition from sa to fa is likely to reduce profit shifting from the fa union to non fa tax havens in a long run tax competition analysis we find a negative water s edge externality under fa that tends to be less detrimental than the profit shifting externality under sa and may offset other externalities under fa

precautionary saving a review of the empirical literature standard macroeconomic models show that uncertainty plays a significant role in consumption and saving decisions under rather mild conditions namely the convexity of the marginal utility of consumption increased uncertainty generates a positive extra saving the so called precautionary saving although this hypothesis has been tested by a large number of authors both at macro and micro level the empirical results are not conclusive and the main conclusion than can be drawn is that there is neither consensus on the intensity of that motive for saving nor on the most appropriate measure of uncertainty this paper provides a comprehensive review of the empirical literature discussing the main controversial issues and the different approaches followed by the studies addressing empirically the test of precautionary saving

moderate stake variations for risk and uncertainty gains and losses methodological implications for comparative studies risk attitudes are known to be sensitive to large stake variations however little is known on the sensitivity to moderate variations in stakes this is important for studies that want to compare risk attitudes between countries or over time i find that variations of 20 affect only utility while larger variations may affect also probability weighting surprisingly the effect on weighting functions is larger for losses than for gains it is also more pronounced for risk than for uncertainty

the effect of national culture on the choice of entry mode characteristics of national cultures have frequently been claimed to influence the selection of entry modes this article investigates this claim by developing a theoretical argument for why culture should influence the choice of entry two hypotheses are derived which relate culture to entry mode choice one focusing on the cultural distance between countries the other on attitudes towards uncertainty avoidance using a multinomial logit model and controlling for other effects the hypotheses are tested by analysing data on 228 entries into the united states market by acquisition wholly owned greenfield and joint venture empirical support for the effect of national culture on entry choice is found

psychic distance and organizational performance an empirical examination of international retailing operations we develop a reconceptualization and operationalization of psychic distance that broadens the concept we then empirically test this operationalization and investigate the relationship between psychic distance and organizational performance our results suggest that psychic distance as a summary construct explains a significant proportion of the variance in financial performance and strategic effectiveness however disaggregation of the construct substantially increases its explanatory power the results also support a psychic distance paradox where psychic distance has a positive relationship with organizational performance

the rich domain of uncertainty source functions and their experimental implementation we often deal with uncertain events for which no probabilities are known several normative models have been proposed descriptive studies have usually been qualitative or they estimated ambiguity aversion through one single number this paper introduces the source method a tractable method for quantitatively analyzing uncertainty empirically the theoretical key is the distinction between different sources of uncertainty within which subjective choice based probabilities can still be defined source functions convert those subjective probabilities into willingness to bet we apply our method in an experiment where we do not commit to particular ambiguity attitudes but let the data speak

exploring higher order risk effects higher order risk effects play an important role in examining economic behavior under uncertainty a precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one s behavior towards a second risk these two properties also play key roles in aversion to negative skewness and to kurtosis respectively both properties recently have been characterized by preferences over lottery pairs in simple 50 50 gambles the simplicity of this characterization is ideal for experimental investigation this article reports the results of such experiments and concludes that there is behavioral evidence for prudence but not for temperance implications of these results for both expected utility and non expected utility models are examined

precautionary saving and the timing of taxes this paper analyzes the effects of government debt and income taxes on consumption and saving in a world of infinitely lived households having uncertain and heterogeneous incomes the special structure of the model allows exact aggregation across households despite incomplete markets the effects of government debt are shown to be substantial roughly comparable to those resulting from finite horizons and crucially dependent on the length of time until the debt is repaid also anticipated changes in taxes are shown to cause anticipated changes in consumption finally an index of fiscal stance is derived

ambiguity attitudes in a large representative sample using a theorem showing that matching probabilities of ambiguous events can capture ambiguity attitudes we introduce a tractable method for measuring ambiguity attitudes and apply it in a large representative sample in addition to ambiguity aversion we confirm an ambiguity component recently found in laboratory studies a insensitivity the tendency to treat subjective likelihoods as 50 50 thus overweighting extreme events our ambiguity measurements are associated with real economic decisions specifically a insensitivity is negatively related to stock market participation ambiguity aversion is also negatively related to stock market participation but only for subjects who perceive stock returns as highly ambiguous this paper was accepted by james smith decision analysis

comparative business failures of foreign controlled firms in the united states we explore the comparative business failures of foreign owned or controlled firms and domestically owned firms original data are collected regarding foreign controlled firms in the u s that filed for bankruptcy protection were involuntarily liquidated or ceased operations mainly due to poor financial performance during the 1978 1988 period our results show that foreign controlled firms fail less often than domestically owned firms the patterns of foreign controlled business failures and the impacts of entry modes ownership types and national culture on the failures of foreign controlled firms are also examined

portfolio choices and asset prices the comparative statics of ambiguity aversion we investigate the comparative statics of more ambiguity aversion as defined by klibanoff marinacci and mukerji 2005 in the context of the static two asset portfolio problem it is not true in general that more ambiguity aversion reduces the demand for the uncertain asset we exhibit some sufficient conditions to guarantee that ceteris paribus an increase in ambiguity aversion reduces the demand for the ambiguous asset and raises the equity premium for example this is the case when the set of plausible distributions of returns can be ranked according to the monotone likelihood ratio order we also show how ambiguity aversion distorts the price kernel in the alternative portfolio problem with complete markets for contingent claims

ambiguity and nonparticipation the role of regulation we investigate the implications of ambiguity aversion for performance and regulation of markets in our model agents decision making may incorporate both risk and ambiguity and we demonstrate that nonparticipation arises from the rational decision by some traders to avoid ambiguity in equilibrium these participation decisions affect the equilibrium risk premium and distort market performance when viewed from the perspective of traditional asset pricing models we demonstrate how regulation particularly regulation of unlikely events can moderate the effects of ambiguity thereby increasing participation and generating welfare gains our analysis demonstrates how legal systems affect participation in financial markets through their influence on ambiguity the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

on the concavity of the consumption function at least since keynes 1935 many economists have had the intuition that the marginal propensity to consume out of wealth declines as wealth increases nonetheless standard perfect certainty and certainty equivalent versions of intertemporal optimizing models of consumption imply a marginal propensity to consume that is unrelated to the level of household wealth we show that adding income uncertainty to the standard optimization problem induces a concave consumption function in which as keynes suggested the marginal propensity to consume out of wealth or transitory income declines with the level of wealth