dynamic adverse selection a theory of illiquidity fire sales and flight to quality we develop a dynamic equilibrium model of asset markets with adverse selection there exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price dividend ratio in less liquid markets sellers of high quality assets signal quality by accepting a lower trading probability we show how the distribution of sellers private information affects an asset s price and liquidity how a change in that distribution can cause a re sale and a ight to quality and how asset purchase and subsidy programs may raise prices and liquidity and reverse the ight to quality jel d82 g12 this paper develops a dynamic equilibrium model of asset markets with adverse selection the owners of heterogeneous assets are privately informed about the quality of their assets sellers set prices for their assets recognizing that sales may be rationed at high prices buyers set prices recognizing that the quality of available assets may depend on the price selected in equilibrium sellers of high quality assets are willing to set a high price despite the low sale probability because the continuation value from failing to sell a high quality asset is high conversely sellers of low quality assets opt for a low price buyers are indifferent between paying a low price for a low quality asset and a high price for a high quality asset we prove these results in a deliberately stylized dynamic general equilibrium framework assets are perfectly durable and pay a constant dividend each period some amount of a perfectly perishable consumption good better quality assets pay a higher dividend but only the asset s current owner observes the dividend this is the source of private information and the root of the adverse selection problem as in akerlof 1970 the only permissible trades are between the consumption good and the asset individuals are risk neutral and have a discount factor that changes over time independently across individuals creating gains from trade finally discount factors are observable which ensures that patient individuals never sell assets since there are no gains from trade we believe this framework is useful for capturing

reference dependent ambiguity abstract motivated by experimental and empirical evidence i study a framework where reference points such as a status quo endowment or default option can distort the way an individual responds to ambiguity i characterize a model of reference dependent maxmin expected utility and provide behavioral foundations for comparing reference dependent ambiguity attitudes i also illustrate some implications of reference dependent ambiguity for trade in an asset market including underdiversification no trade and the potential for a market collapse

an efficiency theorem for incompletely known preferences there are n agents who have von neumann morgenstern utility functions on a finite set of alternatives a each agent i s utility function is known to lie in the nonempty convex relatively open set ui suppose l is a lottery on a that is undominated meaning that there is no other lottery that is guaranteed to pareto dominate l no matter what the true utility functions are then there exist utility functions ui ui for which l is pareto efficient this result includes the ordinal efficiency welfare theorem as a special case

indecisiveness in behavioral welfare economics abstract when an individual s preferences depend on the time or frame at which decisions are made the preferences that appear at different frames must be aggregated in order to make social decisions suppose we aggregate each individual i s frame based preferences with a behavioral welfare relation that ranks x above y if when both x and y are available i sometimes choose x and not y and never chooses y and not x the set of pareto optima can then be large in fact a small amount of preference diversity across frames can cause every allocation to be pareto optimal more generally the set of pareto optima will have the same dimension as the set of allocations the pareto criterion then will not be able to discriminate locally among policy options a small distortion for example will call for no policy response

on the indifference relation in bewley preferences abstract bewley s 2002 influential model of preferences over uncertain prospects features an incomplete preference relation and a set of priors over the states of the world such that one act is preferred to another if and only if its expected utility is higher under every prior in that set this note shows that under general conditions on preferences the decision maker in the bewley model cannot be indifferent between distinct monetary acts whenever the set of priors is fully dimensional in the special case of two states in particular such objectively rational preferences are incomplete if and only if the indifference relation is trivial in the above sense

speculation under unawareness no trade theorems establish that in various trading environments investors who share a common prior will not engage in speculation as long as expected utility bayesian updating and full awareness are imposed we relax the last assumption by allowing for asymmetric unawareness and examine under which conditions speculative behaviour emerges we find that if common knowledge is assumed as in the settings of aumann 1976 and milgrom and stokey 1982 unawareness cannot generate speculation this is not true however in settings where no common knowledge is assumed such as speculation in equilibrium geanakoplos 1989 and betting that is always beneficial morris 1994 unless stronger conditions on awareness are imposed

the changing size distribution of u s trade unions and its description by pareto s distribution the size distribution of trade unions in the united states and changes in this distribution are documented because the most profound changes are taking place among very large unions these are subject to special analysis by invoking pareto s distribution this represents a new application of this distribution extensions to trade union wealth and to britain are broached the role of the public sector in these changes receives particular attention a simple model helps account both for the logarithmic distribution of union membership and for the contrasting experiences of public and private sector unions since the 1970s

ambiguity aversion in the long run to disagree we must also agree abstract we consider an economy populated by smooth ambiguity averse agents with complete markets of securities contingent to economic scenarios where bankruptcy is permitted but there is a penalty for it we show that if agents posterior belief reductions given by their average probabilistic beliefs do not become homogeneous then an equilibrium does not exist it is worth noting that our main result does not imply any convergence of ambiguity perception or even the attitudes towards it in this way complete markets with default and punishment allow for ambiguity aversion in the long run and the agents can disagree on their ambiguity perception but they must agree on their expected beliefs

fuzzy logic trading uncertainty and technical trading abstract from the market microstructure perspective technical analysis can be profitable when informed traders make systematic mistakes or when uninformed traders have predictable impacts on price however chartists face a considerable degree of trading uncertainty because technical indicators such as moving averages are essentially imperfect filters with a nonzero phase shift consequently technical trading may result in erroneous trading recommendations and substantial losses this paper presents an uncertainty reduction approach based on fuzzy logic that addresses two problems related to the uncertainty embedded in technical trading strategies market timing and order size the results of our high frequency exercises show that fuzzy technical indicators dominate standard moving average technical indicators and filter rules for the euro us dollar eur usd exchange rates especially on high volatility days

randomization vs selection how to choose in the absence of preference decision makers sometimes have to choose between alternative options about which they have no preference either they judge the options equally valuable indifference or they have no judgment about their relative value noncomparability choosing randomly is generally considered a natural way to deal with such situations this paper shows however that systematic randomization between noncomparable options may lead to a chain of decisions resulting in monetary losses a money pump furthermore these losses can be avoided by deliberately selecting one of the noncomparable options instead of randomizing thus randomization among noncomparable options is costly relative to deliberate selection on the other hand randomization among indifferent options is costless relative to deliberate selection

exploratory analysis of prospects for renewable energy private investment in the u s opportunities for private investments in renewable energies were explored using a stated preference investment allocation instrument allocation alternatives included conventional and renewable energy investments among renewable energy investments solar and wind energy were ranked the highest while grass and wood based technologies were at the bottom of the renewable energy list this ranking mirrors the allocation of investments in sustainable energy technologies in global markets results were analyzed using a two limit tobit model which suggests that certainty of investments a diversified portfolio and expectation on financial returns were the primary drivers behind funds allocated to renewable energy investments using cluster analysis twenty three percent of our sample of current and future investors was identified as individuals most willing to invest in renewable energies

robust social decisions we propose and operationalize normative principles to guide social decisions when individuals potentially have imprecise and heterogeneous beliefs in addition to conflicting tastes or interests to do so we adapt the standard pareto principle to those preference comparisons that are robust to belief imprecision and characterize social preferences that respect this robust principle we also characterize a suitable restriction of this principle the former principle provides stronger guidance when it can be satisfied when it cannot the latter always provides minimal guidance

uncertainty and risk in financial markets this paper considers a general equilibrium model in which the distinction between uncertainty and risk is formalized by assuming agents have incomplete preferences over statecontingent consumption bundles as in bewley 1986 without completeness individual decision making depends on a set of probability distributions over the state space a bundle is preferred to another if and only if it has larger expected utility for all probabilities in this set when preferences are complete this set is a singleton and the model reduces to standard expected utility in this setting we characterize pareto optima and equilibria and show that the presence of uncertainty generates robust indeterminacies in equilibrium prices and allocations for any specification of initial endowments we derive comparative statics results linking the degree of uncertainty with changes in equilibria despite the presence of robust indeterminacies we show that equilibrium prices and allocations vary continuously with underlying fundamentals equilibria in a standard risk economy are thus robust to adding small degrees of uncertainty finally we give conditions under which some assets are not traded due to uncertainty aversion

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

the dynamics of trade unionism and national economic performance i test two theories of the political processes of trade unions the first argues that wage moderation depends on a centralized labor movement the second contends that institutional conditions permitting unions coordination of bargaining strategies is sufficient coordination is most likely to he achieved when there are small number of unions that do not compete for members that is when union monopoly is high important empirical anomalies may be resolved by analyzing the effects of union centralization and monopoly separately rather than combining them into a composite index of corporatism reanalyzing comparative data from organization of economic cooperation and development countries between 1963 and 1985 largely corroborates the hypothesis that monopoly is more important than either centralization or composite indices of corporatism for national economic performance the conceptual rationale underlying indices of corporatism should be reexamined

knightian uncertainty and moral hazard abstract this paper presents a principal agent model in which the agent has imprecise beliefs we model this situation formally by assuming the agent s preferences are incomplete as in bewley 1986 2 in this setting incentives must be robust to knightian uncertainty we study the implications of robustness for the form of the resulting optimal contracts we give conditions under which there is a unique optimal contract and show that it must have a simple flat payment plus bonus structure that is output levels are divided into two sets and the optimal contract pays the same wage for all output levels in each set we derive this result for the case in which the agent s utility function is linear and then show it also holds if this utility function has some limited curvature

ambiguity aversion and incompleteness of financial markets it is widely thought that incomes risks can be shared by trading in financial assets but financial assets typically carry some risk idiosyncratic to them hence disposing incomes risk using financial assets will involve buying into the inherent idiosyncratic risk however standard theory argues that diversification would reduce the inconvenience of idiosyncratic risk to arbitrarily low levels this argument is less robust than what standard theory leads us to believe ambiguity aversion can exacerbate the tension between the two kinds of risks to the point that classes of agents may not want to trade some financial assets thus theoretically the effect of ambiguity aversion on financial markets is to make the risk sharing opportunities offered by financial markets less complete than it would be otherwise

financial complexity and trade what are the implications on trading activity if investors are not sophisticated enough to understand and evaluate trades that have a complex payoff structure can frictions generated by this type of financial complexity be so severe that they lead to a complete market freeze like that of the recent financial crisis starting from an allocation that is not pareto optimal we find that whether complexity impedes trade depends on how investors perceive risk and uncertainty for smooth convex preferences such as subjective expected utility complexity cannot halt trade even in the extreme case where each investor is so unsophisticated that he can only trade up to one arrow debreu security without being able to combine two or more in order to construct a complex trade however for non smooth preferences which allow for kinked indifference curves such as maxmin expected utility complexity can completely shut down trade

first order and second order ambiguity aversion different models of uncertainty aversion imply strikingly different economic behavior the key to understanding these differences lies in the dichotomy between first order and second order ambiguity aversion which i define here my definition and its characterization are independent of specific representations of decisions under uncertainty i show that with second order ambiguity aversion a positive exposure to ambiguity is optimal if and only if there is a subjective belief such that the act s expected outcome is positive with first order ambiguity aversion zero exposure to ambiguity can be optimal examples in finance insurance and contracting demonstrate the economic relevance of this dichotomy this paper was accepted by han bleichrodt decision analysis

knightian analysis of the vickrey mechanism we analyze the vickrey mechanism for auctions of multiple identical goods when the players have both knightian uncertainty over their own valuations and incomplete preferences in this model the vickrey mechanism is no longer dominant strategy and we prove that all dominant strategy mechanisms are inadequate however we also prove that in undominated strategies the social welfare produced by the vickrey mechanism in the worst case is not only very good but also essentially optimal

pareto optima and equilibria when preferences are incompletely known an exchange economy in which agents have convex incomplete preferences defined by families of concave utility functions is considered sufficient conditions for the set of efficient allocations and equilibria to coincide with the set of efficient allocations and equilibria that result when each agent has a utility in her family are provided welfare theorems in an incomplete preferences framework therefore hold under these conditions and efficient allocations and equilibria are characterized by first order conditions

intertemporal equilibria with knightian uncertainty we study a dynamic and infinite dimensional model with incomplete multiple prior preferences in interior efficient allocations agents share a common risk adjusted prior and 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 a specific model with neither risk nor uncertainty at the aggregate level is considered risk is always fully insured for small levels of ambiguity there exists an equilibrium with inertia where agents also insure fully against knightian uncertainty when the level of ambiguity exceeds a critical threshold full insurance no longer prevails and there exist equilibria with inertia where agents do not insure against uncertainty at all we also show that equilibria with inertia are indeterminate

concentration trends in union structure an international comparison the structure of unionism in nine western countries became on the whole more concentrated during the two decades 1957 58 to 1977 78 as indicated by a reduction in the number of national unions affiliated with major federations and an increase in the relative size of the largest unions the reasons for the trend which has implications for the internal life of unions and for collective bargaining are linked to the efforts of unions to adapt their structure to changes in the environments in which they operate often reinforced by pro merger pressures from the central labor federations the trend toward greater concentration may be expected to continue especially in countries in which the major trade union federations are still composed of substantial numbers of affiliated unions

interim efficient allocations under uncertainty abstract this paper considers an exchange economy under uncertainty with asymmetric information uncertainty is represented by multiple priors and posteriors of agents who have either bewley s incomplete preferences or gilboa schmeidler s maximin expected utility preferences the main results characterize interim efficient allocations under uncertainty that is they provide conditions on the sets of posteriors thus implicitly on the way how agents update the sets of priors for non existence of a trade which makes all agents better off at any realization of private information for agents with the incomplete preferences the condition is necessary and sufficient but for agents with the maximin expected utility preferences the condition is sufficient only a couple of necessary conditions for the latter case are provided

ambiguity and uncertainty in ellsberg and shackle this paper argues that the similarities between ellsberg s and shackle s frameworks for discussing the limits of the probabilistic approach to decision theory are more important than usually admitted the paper discusses the grounds on which the ambiguity surrounding the decision maker in ellsberg s urn experiments can be deemed analogous to the uncertainty faced by shackle s entrepreneur taking crucial decisions the two authors insights are assessed and special attention is paid to the criteria for decision under uncertainty they put forward the paper establishes a link between ellsberg s and shackle s perspectives and the non additive probability approach of gilboa and schmeidler an approach that offers an alternative to standard probability calculus which can be of use to analyse both ambiguity and uncertainty the comparison between ellsberg and shackle draws on an interpretation of keynes s treatise on probability emphasising keynes s rejection of both well defined probability functions and maximisation as a guide to human conduct it is shown that keynes s viewpoint implies a reconsideration of the boundaries of probability theory that is in the same vein of ellsberg s and shackle s concern in the years of the consolidation of savage s new probabilistic mainstream copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

stable coalition structures with open membership and asymmetric firms i study games of coalition formation with open membership where firms form associations in order to decrease their costs before competing on the market according to previous analyses only the grand coalition forms at the nash equilibrium of such games i show that this result hinges on the assumption of symmetric firms i therefore introduce asymmetric firms in a game where only two associations can form i demonstrate that there exists a coalition proof nash equilibrium coalition structure in this game and that when the equilibrium involves two associations all the members of an association have a higher taste for this association than all nonmembers do journal of economic literature classification numbers c70 c72 l13

the uncertain foundations of the welfare state abstract the welfare state is often portrayed as provider of insurance against uncertainties in knight s 1921 sense of the term which would be refused or underinsured on private markets this image conflicts with the standard economic model of risk exchange founded on the subjective interpretation of probability which predicts that all individual uncertainties will be insured by private markets our aim in this paper is to explain why this prediction fails and building on contributions to decision theory that take seriously the idea of knightian uncertainty to show why social insurance may be justified

sharing risk and ambiguity we study the market implications of ambiguity in common models we show that generic determinacy is a robust feature in general equilibrium models that allow a distinction between ambiguity and risk

coalition proof nash equilibria ii applications abstract in bernheim peleg and whinston coalition proof equilibria i concepts j econ theory 42 1987 1 12 we proposed the notion of coalition proof nash equilibrium and perfectly coalition proof nash equilibrium as solution concepts for strategic environments in which players can freely discuss their strategies but cannot make binding commitments this paper undertakes applications to several economic problems including the behavior of cournot oligopolists oligopolistic entry deterrence cooperation in finite horizon games and social choice rule implementation

the existence and efficiency of general equilibrium with incomplete markets under knightian uncertainty abstract this paper first establishes the existence of equilibrium for an economy with knightian uncertainty and incomplete markets and then demonstrates the constrained pareto efficiency of the equilibrium when there is one commodity only in each state of nature

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

distributional analysis of portfolio choice trading in a market is compared with receiving some particular consu mption bundle given increasing state independent preferences and complete markets the analysis focuses on the distribution price of t he particular bundle the distributional price is the price of the ch eapest utility equivalent bundle sold in the market the distribution al price is determined by the distribution functions of the outside b undle and the state price density simple portfolio performance measu res illustrate the value of the approach unlike capm based measures these measures are valid even when superior information is the sourc e of superior performance copyright 1988 by the university of chicago

overlapping risk adjusted sets of priors and the existence of efficient allocations and equilibria with short selling the theory of existence of equilibrium with short selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences no arbitrage conditions are given in terms of risk adjusted priors a sufficient condition for existence of efficient allocations is the overlapping of the interiors of the risk adjusted sets of priors or the inexistence of mutually compatible trades with non negative expectation with respect to any risk adjusted prior these conditions are necessary when agents are not risk neutral at extreme levels of wealths it is shown that the more uncertainty averse or risk averse the agents the more likely are efficient allocations and equilibria to exist

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

opaque trading disclosure and asset prices implications for hedge fund regulation we construct a rational expectations equilibrium model to investigate the effect of ambiguity about hedge fund strategies on market efficiency and aggregate welfare in our model some traders mutual funds view the equilibrium trading strategies of other traders hedge funds as ambiguous this ambiguity limits the ability of mutual funds to infer information from prices and affects the market performance we use this analysis to investigate the implications of regulations that affect the amount of ambiguity about hedge fund strategies or the cost of operating a hedge fund our analysis demonstrates how regulations affect asset prices and welfare through their influence on opaque trading

incomplete preferences and equilibrium in contingent markets this paper shows that betting or speculative trading between agents with incomplete preferences is likely to occur if agents have access to convex choice sets this contrasts sharply with endowment economy models where preference incompleteness often hinders betting speculative trading or mutually beneficial insurance arrangements our results imply that decision makers with identical tastes and identical feasible sets will potentially gain from speculative trade for generic status quo allocations we also develop a framework for endogenizing the status quo allocations of decision makers that are treated exogenously in the existing literature finally we provide a tractable differential representation of status quo allocations equilibria and conditions where speculative trade may or may not emerge

uncertainty in an interconnected financial system contagion and market freezes this paper studies contagion and market freezes caused by uncertainty in financial network structures our model demonstrates that in a financial system where financial institutions are interconnected a negative shock to an individual financial institution could spread to other institutions causing market freezes because of creditors uncertainty about the financial network structure our model also reveals that when both a large creditor and a continuum of small creditors are present the size of the large creditor will affect the severity of market freezes substantially moreover our model is used to examine central bank policies to alleviate market freezes

asset demands without the independence axiom an important application of the theory of choice under uncertainty is to asset markets and an important property in these markets is a preference for portfolio diversification if an investor is an expected utility maximizer then s he is risk averse if and only if s he exhibits a preference for diversification this paper examines the relationship between risk aversion and portfolio diversification when preferences over probability distributions of wealth do not have an expected utility representation

on the duality between prior beliefs and trading demands in an abstract model with asymmetric information we show that there is a duality relationship between the prior beliefs and trading demands of bets for any given individual then we aggregate all the agents to obtain a second duality relationship between common prior beliefs and trading possibilities we easily derive from these relationships the no trade theorem and its converse general efficiency results can be obtained moreover our framework is sufficiently general to cover special cases proved previously for example econometrica 62 1994 1327 discussion paper 83 center for rationality and interactive decision theory the hebrew university of jerusalem 1995 j econom theory 91 2000 127 gameseconom behav 24 1998 172 yet our argumentsare both simple and intuitive r 2003 published by elsevier science usa

risk management strategies via minimax portfolio optimization recent extreme economic developments nearing a worst case scenario motivate further examination of minimax linear programming approaches for portfolio optimization risk measured as the worst case return is employed and a portfolio from maximizing returns subject to a risk threshold is constructed minimax model properties are developed and parametric analysis of the risk threshold connects this model to expected value along a continuum revealing an efficient frontier segmenting investors by risk preference divergence of minimax model results from expected value is quantified and a set of possible prior distributions expressing a degree of knightian uncertainty corresponding to risk preference determined the minimax model will maximize return with respect to one of these prior distributions providing valuable insight regarding an investor s risk attitude and decision behavior linear programming models for financial firms to assist individual investors to hedge against losses by buying insurance and a model for designing variable annuities are proposed

interim efficiency with meu preferences abstract recently kajii and ui 2009 17 proposed to characterize interim efficient allocations in an exchange economy under asymmetric information when uncertainty is represented by multiple posteriors when agents have bewley s incomplete preferences kajii and ui 2009 17 proposed a necessary and sufficient condition on the set of posteriors however when agents have gilboa schmeidler s maxmin expected utility preferences they only propose a sufficient condition the objective of this paper is to complete kajii and ui s work by proposing a necessary and sufficient condition for interim efficiency for various models of ambiguity aversion and in particular maxmin expected utility our proof is based on a direct application of some results proposed by rigotti shannon and stralecki 2008 24

survival with ambiguity we analyze a market populated by expected utility maximizers and smooth ambiguity averse consumers we study conditions under which ambiguity averse consumers survive and affect prices in the limit if ambiguity vanishes with time or if the economy exhibits no aggregate risk ambiguity averse consumers survive but have no long run impact on prices in both scenarios ambiguity averse consumers are fully insured against ambiguity in equilibrium and thus behave as expected utility maximizers with correct beliefs if ambiguity averse consumers are not fully insured against ambiguity their behavior mimics expected utility maximizers with wrong beliefs and a stochastic discount factor which might be consistently higher or lower than their actual discount factor we use this insight to analyze a markov economy with large persistent ambiguity consumers with decreasing absolute ambiguity aversion whose prudence with respect to ambiguity exceeds twice their absolute ambiguity aversion a s survive in the presence of expected utility maximizers with correct beliefs if the economy further exhibits aggregate risk they drive the expected utility maximizers out of the market and determine prices in the limit in contrast consumers with increasing or constant absolute ambiguity aversion only survive in the absence of aggregate risk and have no impact on limit prices

a more robust definition of subjective probability the goal of choice theoretic derivations of subjective probability is to separate a decisionmaker s underlying beliefs subjective probabilities of events from their preferences attitudes toward risk classical derivations have all relied upon some form of the marschak samuelson independence axiom or the savage sure thing principle which imply that preferences over lotteries conform to the expected utility hypothesis this paper presents a choice theoretic derivation of subjective probability in a savage type setting of purely subjective uncertainty which neither assumes nor implies that the decisionmaker s preferences over lotteries necessarily conform to the expected utility hypothesis copyright 1992 by the econometric society

ambiguity aversion decreases the impact of partial insurance evidence from african farmers indemnifying smallholder farmers against crop loss is thought to play an important role in encouraging the adoption of new technologies and facilitating productivity growth but to be infeasible due to information problems consequently there is interest in developing alternative partial insurance products examples include rainfall insurance and the limited liability inherent in credit contracts i argue that although these products may reduce information asymmetry ambiguity averse farmers struggle to assess whether the contracts reduce risk this problem is most pronounced when the production technology is ambiguous as is likely the case for new technologies i formalize this argument and test the theory using data from two rcts conducted in malawi and kenya comparative statics from the theory are consistent with both sets of data and i argue that income losses from ambiguity aversion may be substantial

competitive lending with partial knowledge of loan repayment some positive and normative analysis we study a credit market where lenders with partial knowledge of repayment use one of several criteria to make lending decisions supposing that a public authority wants to maximize the social return to borrowing we study interventions that manipulate the return on the safe asset or guarantee a minimum loan return manipulating the return on the safe asset is effective if lender beliefs about the return to lending are not too pessimistic relative to those of the authority guaranteeing a minimum return is effective if lender beliefs are not too optimistic relative to those of the authority

why did the equity home bias fall during the financial panic of 2008 investors tend to put most of their wealth in local stocks theories of portfolio choice and uncertainty aversion jointly predict that this home bias should increase during a financial crisis yet using a sample of 45 countries i document that the equity home bias fell during the financial panic of 2008 exploiting bilateral stock holdings i find that investors actively increased their home bias but large valuation changes subsumed these trades across countries the change in home bias is consistent with partial portfolio rebalancing and increased information asymmetries during the crisis

keynes meets markowitz the trade off between familiarity and diversification we develop a model of portfolio choice to nest the views of keynes who advocates concentration in a few familiar assets and markowitz who advocates diversification we use the concepts of ambiguity and ambiguity aversion to formalize the idea of an investor s familiarity toward assets the model shows that for any given level of expected returns the optimal portfolio depends on two quantities relative ambiguity across assets and the standard deviation of the expected return estimate for each asset if both quantities are low then the optimal portfolio consists of a mix of familiar and unfamiliar assets moreover an increase in correlation between assets causes an investor to increase concentration in familiar assets flight to familiarity alternatively if both quantities are high then the optimal portfolio contains only the familiar asset s as keynes would have advocated in the extreme case in which both quantities are very high no risky asset is held nonparticipation this paper was accepted by brad barber teck ho and terrance odean special issue editors

coalition proof correlated equilibrium a definition a coalition proof correlated equilibrium of a game is a pair consisting of a correlation device and a coalition proof nash equilibrium of the game extended by the device a direct coalition proof correlated equilibrium is a canonical device such that the obedient strategy is a coalition proof nash equilibrium of the canonical extended game the revelation principle may not hold even for two person games direct coalition proof correlated equilibrium may fail to exist for games with more than two players for any game a pure coalition proof nash equilibrium is a direct coalition proof correlated equilibrium c 1996 academic press inc

coalition proof equilibrium we characterize the agreements that the players of a noncooperative game may reach when they can communicate prior to play but they cannot reach binding agreements a coalition proof equilibrium is a correlated strategy from which no coalition has an improving and self enforcing deviation we show that any correlated strategy whose support is contained in the set of actions that survive the iterated elimination of strictly dominated strategies and weakly pareto dominates every other correlated strategy whose support is contained in that set is a coalition proof equilibrium consequently the unique equilibrium of a dominance solvable game is coalition proof journal of economic literature classification

coalition proofness and correlation with arbitrary communication possibilities abstract the ability of the members of a coalition to communicate secretly determines whether the coalition can coordinate to deviate from a proposed strategy and thus affects which strategies are coalition proof we show that the existence of a pareto best element in the set of strategies that survive iterated elimination of dominated strategies implies the existence of a coalition proof correlated equilibrium for any specification of coalitional communication possibilities that always permits individual deviations such an element exists in games with strategic complementarities if either 1 there is a unique nash equilibrium or 2 each player s payoff is nondecreasing in the others strategies journal of economic literature classification number c72

uncertainty efficiency and incentive compatibility ambiguity solves the conflict between efficiency and incentive compatibility abstract a fundamental result of modern economics is the conflict between efficiency and incentive compatibility that is the fact that some pareto optimal efficient allocations are not incentive compatible this conflict has generated a huge literature which almost always assumes that individuals are expected utility maximizers what happens if they have other kind of preferences is there any preference where this conflict does not exist can we characterize those preferences we show that in an economy where individuals have complete transitive continuous and monotonic preferences every efficient allocation is incentive compatible if and only if individuals have maximin preferences

rollover risk and market freezes the debt capacity of an asset is the maximum amount that can be borrowed using the asset as collateral we model a sudden collapse in the debt capacity of good collateral we assume short term debt that must be frequently rolled over a small transaction cost of selling collateral in the event of default and a small probability of meeting a buy to hold investor we then show that a small change in the asset s fundamental value can be associated with a catastrophic drop in the debt capacity the kind of market freeze observed during the crisis of 2007 to 2008 one of the many striking features of the crisis of 2007 to 2008 was the sudden freeze in the market for the rollover of short term debt from an in stitutional perspective the inability to borrow overnight against high quality but long term assets was a market failure that effectively led to the demise of a substantial part of investment banking in the united states more broadly it led to the collapse in the united states the united kingdom and other countries of banks and other financial institutions that had relied on signifi cant maturity mismatch between assets and liabilities and in particular on the rollover of short term wholesale debt in the asset backed commercial paper abcp and overnight sale and repurchase repo markets in this paper we are interested in developing a model of a sudden collapse in the ability to borrow short term against long lived assets in the absence of obvious problems of asymmetric information or fears about the value of col lateral we refer to this phenomenon as a market freeze more precisely a market freeze occurs when the debt capacity the maximum amount of collat eralized borrowing that can be supported by an asset is a small fraction of the fundamental value the economic value measured by the net present value npv of the stream of future returns an extreme form of a market freeze occurs when the fundamental value is close to the maximum possible value of the asset whereas the debt capacity is close to the minimum possible value of the asset

lending on hold regulatory uncertainty and bank lending standards abstract the 2011 2013 rule making process for the regulation of qualified mortgages was correlated with a reduction in mortgage lending in this paper we document this correlation at the bank level using a novel measure of banks perception of regulatory uncertainty we offer suggestive evidence that banks that perceived higher regulatory uncertainty or that were more adverse to it reduced lending more severely other channels that might explain banks lending behavior investment securitization putbacks by government sponsored enterprises and general economic uncertainty are also considered

liquidity and valuation in an uncertain world abstract during the 2007 2009 financial crisis there was little or no trading in a variety of financial assets even though bid and ask prices existed for many of these assets we develop a model in which this illiquidity arises from uncertainty and we argue that this new form of illiquidity makes bid and ask prices unsuitable as metrics for establishing fair value for these assets we show how the extreme uncertainty that traders face can be characterized by incomplete preferences over portfolios and we use bewley s 2002 model of decision making under uncertainty to derive equilibrium quotes and the nonexistence of trading at these quotes we then suggest alternatives for valuing assets in illiquid markets

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

risk sharing in the small and in the large abstract this paper analyzes risk sharing in economies with no aggregate uncertainty when agents have non convex preferences in particular agents need not be globally risk averse or uncertainty averse in the sense of schmeidler 1989 we identify a behavioral condition under which betting is inefficient i e every pareto efficient allocation provides full insurance and conversely if and only if agents supporting probabilities defined as in rigotti et al 2008 have a non empty intersection our condition is consistent with empirical and experimental evidence documenting violations of convexity in either outcomes or utilities our results show that the connection between speculative betting and inconsistent beliefs does not depend upon global notions of risk or ambiguity aversion

decision theory under ambiguity we review recent advances in the field of decision making under uncertainty or ambiguity we start with a presentation of the general approach to a decision problem under uncertainty as well as the standard bayesian treatment and issues with this treatment we present more general approaches choquet expected utility maximin expected utility smooth ambiguity and so forth that have been developed in the literature under the name of models of ambiguity sensitive preferences we draw a distinction between fully subjective models and models incorporating explicitly some information we review definitions and characterizations of ambiguity aversion in these models we mention the challenges posed by some of the models presented we end with a review of part of the experimental literature and applications of these models to economic settings

volatility of aggregate volatility and hedge fund returns abstract this paper investigates empirically whether uncertainty about equity market volatility can explain hedge fund performance both in the cross section and over time we measure uncertainty via volatility of aggregate volatility vov and construct an investable version through returns on lookback straddles on the chicago board options exchange cboe volatility index vix we find that vov exposure is a significant determinant of hedge fund returns after controlling for fund characteristics we find a robust and significant negative risk premium for vov exposure in the cross section of hedge fund returns we corroborate our results using statistical and parameterized proxies of vov over a longer sample period

subjective beliefs and ex ante trade we study a definition of subjective beliefs applicable to preferences that allow for the perception of ambiguity and provide a characterization of such beliefs in terms of market behavior using this definition we derive necessary and sufficient conditions for the efficiency of ex ante trade and show that these conditions follow from the fundamental welfare theorems when aggregate uncertainty is absent our results show that full insurance is efficient if and only if agents share some common subjective beliefs our results hold for a general class of convex preferences which contains many functional forms used in applications involving ambiguity and ambiguity aversion we show how our results can be articulated in the language of these functional forms confirming results existing in the literature generating new results and providing a useful tool for applications

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

a definition of uncertainty aversion a definition of uncertainty or ambiguity aversion is proposed it is argued that the definition is well suited to modelling within the savage as opposed to anscombe and aumann domain of acts the defined property of uncertainty aversion has intuitive empirical content behaves well in specific models of preference multiple priors and choquet expected utility and is tractable tractability is established through use of a novel notion of differentiability for utility functions called eventwise differentiability

destructive effects of constructive ambiguity in risky times unclear bailout policy underinvestment and calls for greater responsibility by bankers are some of the observations from the recent financial crisis the paper explains underinvestment as an inefficient equilibrium under ambiguous bailout policy agents suffer from a lack of information about the insolvency resolution methods the beliefs of bankers regarding whether an insolvent bank is liquidated may differ from those of depositors even if bankers and depositors possess absolutely symmetric information about the economy this disrupts the flow of funds through the banking channel if the investment climate is characterized by high aggregate risk the paper suggests policy implications aimed at a reduction of the anxiety of agents and at aligning their beliefs to restore efficiency

when does aggregation reduce risk aversion we study the problem of risk sharing within a household or syndicate a household shares risky prospects using a social welfare functional we characterize the social welfare functionals such that the household is collectively less risk averse than each member and satisfies the pareto principle and an invariance axiom we single out the sum of certainty equivalents as the unique member of this family which is quasiconcave over riskless allocations

asymmetric information nonadditive expected utility and the information revealed by prices an example i develop a simple example of a model in which agents have asymmetric information and preferences that are represented by a nonadditive expected utility function the a priori uninformed agent after observing the equilibrium price has conditional beliefs that remain nonadditive then even when the equilibrium price function is fully revealing i e one to one it may be worth while for an a priori uninformed agent to buy redundant private information if he is more confident in that information than in that revealed by the price system

financial market structures revealed by pricing rules efficient complete markets are prevalent abstract it is well known that when an arbitrage free financial market is incomplete or has tradable financial assets with frictions there must be multiple risk neutral probability measures the main motivation for the present study is to elucidate what type of market structure usually emerges from pricing rules first we obtain that finitely generated pricing rules characterized by polytopes of probabilities capture the class of all finite arbitrage free financial markets that are potentially incomplete or subject to frictions affecting tradable assets next we provide a novel characterization of efficient securities and introduce related notions of market completeness that underlies pricing rules our main result shows that the class of efficient complete markets with bid ask spreads is the prevalent case revealed by finitely generated pricing rules

efficient allocations under ambiguity abstract important implications of the expected utility hypothesis and risk aversion are that if agents have the same probability belief then consumption plans in every efficient allocation of resources under uncertainty are comonotone with the aggregate endowment and if their beliefs are concordant then the consumption plans are measurable with respect to the aggregate endowment we study these two properties of efficient allocations for models of preferences that exhibit ambiguity aversion using the concept of conditional beliefs which we introduce in this paper we provide characterizations of such conditional beliefs for the standard models of preferences used in applications

ambiguity made precise a comparative foundation the theory of subjective expected utility has been recently extended to allow ambiguity to matter for choice we propose a notion of absolute ambiguity aversion by building on a notion of comparative ambiguity aversion we characterize it for a preference model which encompasses some of the most popular models in the literature we next build on these ideas to provide a definition of unambiguous act and event and show the characterization of the latter as an illustration we consider the classical ellsberg 3 color urn problem and find that the notions developed in the paper provide intuitive answers journal of economic literature classification number d81

the ambiguity of earnings announcements we study the consequences of misreporting in settings where ambiguity averse investors face uncertainty about two aspects of the firm its productivity and the weakness of its reporting system we

product differentiation decisions under ambiguous consumer demand and pessimistic expectations abstract this paper studies product differentiation decisions in a spatial duopoly with limited information on consumer demand in particular a situation is discussed in which the firms do not know the exact distribution of the random location of consumer demand and its responsiveness to price changes measured by the scale of transport costs but resolve the resulting ambiguity using the maxmin or minimax regret criteria when the firms are sufficiently pessimistic is high enough results are in contrast with the existing literature in particular an increase of demand location uncertainty decreases the equilibrium product differentiation intensifying the second stage competition in prices although the effect is dampened by uncertainty about transport costs endogenizing the choice of objective function leads to the dominance of an extreme form of pessimism which turns out to be socially optimal

unions employers associations and wage setting institutions in northern and central europe 1950 1992 the eight countries examined in this study austria belgium denmark finland germany the netherlands norway and sweden have long been viewed as exemplifying corporatist industrial relations

microstructure and ambiguity a goal for stock exchanges is to increase participation by firms and investors we show how specific features of the microstructure can reduce perceived ambiguity and induce participation by both investors and issuers we develop a model with sophisticated traders who we view as expected utility maximizers with rational expectations and unsophisticated traders who we view as rational traders facing ambiguity about the payoffs to participating in the market we show how designing markets to reduce ambiguity can benefit investors through greater liquidity exchanges through greater volume and issuing firms through a lower cost of capital