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

does ambiguity aversion survive in experimental asset markets although a number of theoretical studies explain empirical puzzles in finance with ambiguity aversion it is not a given that individual ambiguity attitudes survive in markets in fact despite ample evidence of ambiguity aversion in individual decision making most studies find no or only limited ambiguity aversion in experimental financial markets even when they exclude arbitrage we argue that ambiguity effects in markets depend on market feedback and on a sufficiently strong bias toward ambiguity among the participants accordingly we find significant ambiguity effects in low feedback call markets for assets that provoke high ambiguity aversion but no ambiguity effects in high feedback double auctions

a two person dynamic equilibrium under ambiguity this paper describes a pure exchange continuous time economy with two heterogeneous agents and complete markets a novel feature of the economy is that agents perceive some security returns as ambiguous in the sense often attributed to frank knight the equilibrium is described completely in closed form after identifying agents as countries the model is applied to address the consumption home bias and equity home bias puzzles 2002 elsevier science b v all rights reserved jel classi cation d81 g11 g12 g15

the ellsberg paradox and risk aversion an anticipated utility approach the paper describes a decision process under which it is rational to prefer a lottery with known probabilities to a similar ambiguous lottery where the decision maker does not know the exact values of the probabilities the ellsberg paradox this is done by modeling ambiguous lotteries as two stage lotteries by assuming the independence axiom without the reduction of compound lotteries axiom and by using the anticipated utility functional this paper also gives conditions under which less ambiguity is preferred and presents some comparative statics analysis as well as some inter personal comparisons finally it proves that within the anticipated utility framework risk and ambiguity are almost identical copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the determinants of developing countries access to the international capital market the traditional analysis of western credit relations with developing countries mainly focuses on the possibilities of debtor countries meeting their debt obligations and tries to find factors behind possible default the present study explicitly considers flows of funds between creditors and debtors and investigates the determinants of developing countries access to the international capital market a combination of gdp per capita net debt to gdp and the investment share predicts access to the 1985 87 capital market correctly in 75 per cent of the cases

small worlds modeling attitudes toward sources of uncertainty abstract we introduce the concept of a conditional small world event domain an extension of savage s the foundations of statistics wiley new york 1954 notion of a small world as a self contained collection of comparable events under weak behavioral conditions we demonstrate probabilistic sophistication in any small world event domain without relying on monotonicity or continuity probabilistic sophistication within though not necessarily across small worlds provides a foundation for modeling a decision maker that has source dependent risk attitudes this also helps formalize the idea of source preference and suggests an interpretation of ambiguity aversion often associated with ellsberg type behavior in terms of comparative risk aversion across small worlds

energy justice for all rethinking sustainable development goal 7 through struggles over traditional energy practices in sierra leone abstract with sustainable development goal 7 the united nations has declared its ambition to ensure access to modern energy for all by 2030 aside from broad appeals to differentiated responsibilities and greener technologies however the goal leaves significant procedural questions unaddressed this paper argues that the basic orientation of this approach is problematic undermining possibilities for progress toward energy justice and equitable development first in framing the issue of global energy distribution in broad techno managerial terms it obscures how particular geographies of energy poverty have been shaped by critical political economic influences second in privileging modern forms of energy and focusing on an end state of universal adoption over a broader goal of eliminating energy poverty the approach of sdg7 presents tangible hazards to many of those it seeks to benefit using a case study of sierra leonean rural cooking energy policy we demonstrate how the underlying mentality of sdg7 feeds into existing discourses that marginalise producers and users of traditional energy sources threatening important livelihoods with such evidence we argue that for justice in energy policy to be realised holistically there is a need to question how our knowledge of energy problems have emerged to avoid epistemologically autarchic policy positions

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

economic experiments hypothetical surveys and market data studies of insurance demand against low probability high impact risks a systematic review of designs theoretical insights and determinants of demand this paper provides a systematic review of the literature on 80 experimental hypothetical survey and market data studies of insurance demand against low probability high impact risks the objective of the review is to extract lessons from these studies and to outline an agenda for future research we contrast the results of experimental and survey studies to findings from market data we focus on experimental design methods insurance characteristics as well as results about theories heuristics behavioural biases and explanatory variables lessons for policymakers are drawn which can facilitate disaster preparedness

non additive beliefs and strategic equilibria abstract this paper studies n player games where players beliefs about their opponents behaviour are modelled as non additive probabilities the concept of an equilibrium under uncertainty which is introduced in this paper extends the equilibrium notion of dow and werlang 1994 j econom theory 64 305 324 to n player games in strategic form existence of such an equilibrium is demonstrated under usual conditions for low degrees of ambiguity equilibria under uncertainty approximate nash equilibria at the other extreme with a low degree of confidence maximin equilibria appear finally robustness against a lack of confidence may be viewed as a refinement for nash equilibria journal of economic literature classification numbers c72 d81

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

on fuelwood consumption population dynamics and deforestation in africa abstract as the literature on fuelwood in africa has increased in quality in recent times it has become evident that generalizations about africa s fuelwood crisis need to be treated with great caution as a consequence some commonly held or orthodox beliefs may now need to be reexamined this paper subjects three such beliefs 1 the existence of a linear relationship between population growth fuelwood consumption and rates of fuelwood induced deforestation 2 that fuelwood induced deforestation approximates ripples spreading outward from urban consuming centers and 3 that land conversion to agriculture always reduces fuelwood supplies to close scrutiny the second and third assumptions are analyzed in the light of recently collected field data in the kano area of northern nigeria while the examination of the first is based on a reinterpretation of information from a wider range of invironments the paper concludes that although available data are inadequate for definitive conclusions to be drawn on the first count it seems likely that variations arising out of demographic differentials in urban populations in particular changes in per capita fuelwood consumption resulting from changes in consuming unit size distort direct links between population growth rates and rates of increase in fuel consumption further information on the demographic characteristics of african towns is needed for meaningful analyses of temporal changes in the affected variables to be undertaken the second and third assumptions are found to be inapplicable in the kano case howe1ver this should be interpreted much less as justification for their outright rejection than as a reminder of the great potential of time and space specific considerations for rendering universal rules locally inapplicable

dynamically consistent beliefs must be bayesian abstract experimental evidence such as the ellsberg paradox contradicts the savage model of decision making under uncertainty since the representation of beliefs underlying preferces by a single probability measure leaves no room for the degree of imprecision in information to affect decisions proceeding axiomatically this paper shows that the existence of a bayesain prior is implied even if savage s sure thing principle is deleted if preferences i are based on beliefs and ii admit dynamically consistent updating in response to new information the result raises questions about the appeal of models of preference that feature a separation of tastes and beliefs journal of economic literature classification number d81

a dynamic ellsberg urn experiment two rationality arguments are used to justify the link between conditional and unconditional preferences in decision theory dynamic consistency and consequentialism dynamic consistency requires that ex ante contingent choices are respected by updated preferences consequentialism states that only those outcomes which are still possible can matter for updated preferences we test the descriptive validity of these rationality arguments with a dynamic version of ellsberg s three color experiment and find that subjects act more often in line with consequentialism than with dynamic consistency

urban household energy use in tanzania prices substitutes and poverty abstract this paper presents the findings of the tanzanian urban household energy survey undertaken as part of the tanzania urban energy project household energy use varies by income group according to local fuel availability considerable differences between the marginal costs of supplying fuels and market prices paid by consumers have led to major misallocations of resources when the results of this survey are compared to the results of the 1987 household energy survey a significant shift by households toward kerosene and electricity away from fuelwood charcoal and lpg is shown to have taken place these shifts toward modern fuels are consistent with the claims of the households in the 1990 survey and can largely be explained by fuel prices finally an assessment of the lifeline tariff and the kerosene cross subsidy demonstrate that the latter is a more effective method of ensuring the basic energy needs of the urban and rural poor

from linear fuel switching to multiple cooking strategies a critique and alternative to the energy ladder model abstract promoting sustainable development requires evaluating the technical and policy options that will facilitate the adoption and use of energy efficient and less polluting cooking stoves and practices the transition from traditional to modern fuels and devices has been explained by the energy ladder model that suggests that with increasing affluence a progression is expected from traditional biomass fuels to more advanced and less polluting fuels in this paper we evaluate the energy ladder model utilizing data from a four year 1992 96 case study of a village in mexico and from a large scale survey from four states of mexico we show that an alternate multiple fuel model of stove and fuel management based on the observed pattern of household accumulation of energy options rather than the simple progression depicted in the traditional energy ladder scenario more accurately depicts cooking fuel use patterns in rural households the multiple fuel model integrates four factors demonstrated to be essential in household decision making under conditions of resource scarcity or uncertainty a economics of fuel and stove type and access conditions to fuels b technical characteristics of cookstoves and cooking practices c cultural preferences and d health impacts this model also allows better estimates of the expected fuelwood demand and indoor air pollution in rural households

real incomes and the consumption of woodfuels in ghana an analysis of recent trends abstract as in most developing countries woodfuels account for a major share of the energy consumption in ghana the overdependence on woodfuels has grave potential environmental and health hazards so efforts are being made to popularize efficient energy devices namely cookstoves the paper establishes the linkage between the quantity of woodfuels consumed and the level of real incomes and inflation respectively in the country using time series data from 1974 to 1987 a regression analysis indicates that the quantity of woodfuels consumed in the country is negatively and positively correlated to real incomes and inflation levels respectively it is therefore concluded that the impact of real incomes and inflation and the continued overdependence on woodfuels should not be discounted in light of this efforts to introduce and popularize the utilization of efficient energy devices in the country ought to be facilitated by increases in real incomes inflation control measures and improvement in the standard of living of the populace

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

steady state of energy feedbacks and leverages for promoting or preventing sustainable energy system development abstract while energy demand has been growing over the last few decades and is projected to keep expanding the current energy system is pushing biophysical source and sink limits at the same time growing demand for energy globally is associated with an expansion of welfare to avoid undesired environmental and social implications of energy developments in the long run a systemic understanding of the dynamics promoting or preventing sustainable energy development is needed departing from daly s steady state economics theory this study conceptualizes a sustainable energy system using a systems thinking approach efficiency increase the central element of daly s theory defined as the service throughput ratio is put in the center of a conceptual analysis of a sustainable energy system and is carefully scrutinized meadows leverage points concept is used to facilitate an analysis of different policies that aim at promoting sustainable energy system development this study concludes that energy policies always need to be explored as part of the broader causality structure into which they are embedded otherwise their impacts on other variables in the system may be overlooked such as in the case of efficiency increase which is shown to have undesired side effects for the development of a sustainable energy system

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

characterizing optimism and pessimism directly through comonotonicity pessimism independence is introduced to characterize pessimistic risk attitudes for the nonlinear probability models of schmeidler quiggin and yaari directly in terms of comonotonicity rather than through additional conditions such as convexity of preferences pessimism independence requires the mixture of an arbitrary good and a fixed act to be preferred to the mixture of a comonotonic bad act and the fixed act thus more general than full force independence it does not exclude the additional pessimistic appreciation of the hedging involved in the mixture of a noncomonotonic bad and fixed act more restrictive than comonotonic independence it does exclude optimistic aversion of hedging

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

ambiguity optimism and pessimism in adverse selection models we investigate the effect of ambiguity and ambiguity attitude on the shape and properties of the optimal contract in an adverse selection model with a continuum of types using the parametric model of ambiguity and ambiguity aversion called the neo additive model chateauneuf eichberger and grant 2007 we show that it necessarily features efficiency and a jump at the top and pooling at the bottom of the distribution conditional on the degree of ambiguity the pooling section may or may not be supplemented by a separating section as a result ambiguity adversely affects the principal s ability to solve the adverse selection problem and therefore the least efficient types benefit from ambiguity with respect to risk conversely ambiguity is detrimental to the most efficient types this is confirmed in the comparative statics section

rewarding the profligate and punishing the prudent and poor some recent proposals for debt relief at a conference organized in june 1986 by the overseas development council on the future of the world bank former west german chancellor helmut schmidt investment banker felix rohatyn and the chairman of the federal reserve board paul volcker all suggested that the massive 60 billion trade surplus of japan be mobilized to solve what they termed as the debt problem of the third world mr barber conable the new president of the world bank is quoted by the new york times 3 july 1986 as saying clearly there is the expectation that japan in view of the light defense burden it carries will participate fully in solving collective debt problems of the world he characterized the japanese surpluses as a considerable world asset and suggested that establishing a special facility such as the one established by the imf in the 1970s to tap saudi arabia s surplus petro dollars to recycle them would be one way of dealing with it nearly a year ago in october 1985 at the annual meetings of the world bank and imf at seoul us treasury secretary james baker signaled a shift in the us approach to the debt crisis the baker plan aimed to help highly indebted middle income countries 15 were mentioned by baker 10 of them in latin america resume growth and achieve adjustment towards a sustainable debt position through the adoption of the following course of action by lenders debtors and multilateral agencies within the context of the then prevailing imf supervised case bycase approach commercial banks the world bank and other multilateral development banks were to increase lending to these countries baker suggested that the commercial banks commit a total of 20 billion in net new lending over 198688 and the multilateral development banks an additional 9 billion during the same period this increased net lending was to be in support of the adoption of market oriented policies by indebted nations growth was to be promoted inflation reduced and external balance restored by expanding the role of the private sector and of markets both domestically and internationally the first offspring of the baker plan is the recent growth oriented adjustment plan for mexico which was foisted upon a reluctant imf perhaps the world s last unreconstructed bastion of adjustment through austerity by the combined pressure of the us treasury and federal reserve board and the mexican threat of repudiation the imf s reservations concerned the budgetary features of the package not the novel real growth and oil price contingency clauses which it supported the 18 month standby arrangement with the imf provides mexico with sdr 1 4 billion about 1 7 billion in support of what is described as a comprehensive program of adjustment and structural reform the total financing package amounts to 12 billion of which 6 billion is to come from the commercial banks mexico s economic problems had of course been intensified dramatically as a result of the drop in the price of oil policies aimed at bringing mexico s real gdp growth to 3 5 by 1987 from recent negative growth rates of 4 or 5 involve a variety of growth oriented market friendly adjustment measures increased public investment current expenditure cuts tax reform measures marketbased adjustments in tariffs and prices charged by public sector enterprises liberalizing trade measures mexico is about to join the ga7t and only very mild by traditional imf standards budgetary restraint a reduction in the deficit gdp ratio by three percentage points over 1986 87 the aspect of the mexican program of most interest for this discussion is the actions taken

reassessing the energy ladder household energy use in maun botswana abstract in the context of sub saharan africa s rapid urbanization improved insight into urban energy use is increasingly important based on the predictions of energy transition theory a regional shift from biomass to modern fuels has long been expected to occur in tandem with urban growth however trends observed in the region s towns and cities have often not followed such patterns and fuelwood continues to be important in most areas this paper examines the practical relevance of transition theory using a recent case study conducted by the authors in maun botswana and results previously reported in the literature it finds that despite the long term link between socio economic development and increased modern fuel consumption at the national scale the notion of transition does not accurately reflect ongoing energy use patterns at lower levels of aggregation this is chiefly because its model of household fuel switching largely dismisses the importance of active and strategic decision making by urban consumers and their responsiveness to structural factors such as relative fuel prices as the botswana case illustrates this weakness can significantly distort expectations and policies around urban fuelwood use

fairness and the unselfish demand for redistribution by taxpayers and welfare recipients we illustrate how the desire to live in a fair society that rewards individual effort and hard work triggers an unselfish though rational demand for redistribution this leads the well off to prefer higher taxes and the poor to reject extreme progressivity we then provide evidence of these behaviors using a nationally representative survey from italy our empirical analysis confirms that a stronger aversion to unfair distributive outcomes is associated with a higher support for redistribution by individuals with high income and to a lower demand for redistribution by those with low income

the value of a statistical life under ambiguity aversion abstract the paper shows that ambiguity aversion increases the value of a statistical life if the marginal utility of an increase in wealth is larger if one is alive rather than dead intuitively ambiguity aversion has a similar effect as an increase in the perceived baseline mortality risk and thus operates as the dead anyway effect a numerical example suggests however that ambiguity aversion cannot justify the substantial ambiguity premium apparently embodied in environmental policy making the paper also shows that ambiguity aversion decreases the marginal cost of individual self protection effort but may well decrease its marginal benefit so that the total effect of ambiguity aversion on self protection is unclear

a theory of subjective compound lotteries abstract we develop a savage type model of choice under uncertainty in which agents identify uncertain prospects with subjective compound lotteries our theory permits issue preference that is agents may not be indifferent among gambles that yield the same probability distribution if they depend on different issues hence we establish subjective foundations for the anscombe aumann framework and other models with two different types of probabilities we define second order risk as risk that resolves in the first stage of the compound lottery and show that uncertainty aversion implies aversion to second order risk which implies issue preference and behavior consistent with the ellsberg paradox

official finance requirements in the 1990s abstract estimates based on a savings gap model with endogenous private bank lending suggest that projections of development aid requirements for sub saharan africa low income asia and latin america by fishlow 1987 the development committes 1988 and the un 1988 are too optimistic a substantial increase in official financial flows to developing countries is necessary it appears that an increase in private bank exposure by 25 a 35 debt reduction and a 35 interest reduction as proposed in the recent brady plan are insufficient to reach minimum growth rates in the three developing regions

auction choice for ambiguity averse sellers facing strategic uncertainty abstract the robustness of the bayes nash equilibrium prediction for seller revenue in auctions is investigated in a framework of interdependent valuations generated from independent signals seller expected revenue may fall well below the equilibrium prediction even though the individual payoff consequences of suboptimal bidding may be small for each individual bidder this possibility would be relevant to a seller who models strategic uncertainty as ambiguity and who is ambiguity averse in the sense of gilboa and schmeidler it is shown that the second price auction is more exposed than the first price auction to lost revenue from the introduction of bidder behavior with small payoff errors

declining tree stocks in african countries abstract the paper first discusses evidence of the loss of tree stocks in farming regions of sub saharan african countries and the associated ecological changes taking place the second part discusses the economic merits and limitations of two forms of public investment in afforestation i in forestry management and plantation programs with special reference to watershed and shelterbelt plantings and ii in various forms of support research extension and nurseries for the development of agro or farm forestry in areas where tree stocks are becoming seriously depleted the ecological and economic benefits would be significant for both types of investment shelterbelt and watershed plantings have the advantage of having well defined effects but are limited in scope by their relatively large budgetary and labor requirements it is widely acknowledged that they would need to be complemented by agro forestry development programs by involving the farmers themselves in tree planting and stabilization of soils the development of agro forestry practices in africa would offer prospects of a major increase in afforestation rates at significantly lower budgetary costs per hectare of farmland protected however the risks and difficulties of obtaining a good farmer response are not small and success would depend on economic policies that were far more favorable towards investment in agriculture and natural resources than they have been so far in the region

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

rural household energy consumption the effects of access to electricity evidence from south africa this paper examines household energy consumption patterns in rural areas in the light of energy transition theories in particular the study aims to identify the effects of access to electricity on fuel choice the analysis uses data from an extensive household survey conducted in south africa and examines the prevalence of different fuels energy expenditure the end uses of fuels and multiple fuel use patterns it is concluded that evidence exists for the presence of an energy transition in rural households largely driven by income access to electricity affects the nature of this transition and there is weak evidence to suggest that it accelerates the process

learning and asset prices under ambiguous information we propose a new modeling framework to study the asset pricing implications of learning under ambiguity aversion in a continuous time partial information lucas economy we characterize analytically equilibrium equity returns and make the following observations first learning under ambiguity aversion implies an equilibrium discount for ambiguity if and only if relative risk aversion is below one or equivalently the elasticity of intertemporal substitution eis is above one in this case ambiguity aversion increases conditional equity premia and volatilities second equilibrium interest rates are lower irrespective of risk aversion third no time invariant relation between excess returns and conditional variances exists therefore estimated relations between excess returns and equity conditional variances are highly time varying and have an indeterminate sign fourth estimates of the eis based on standard euler equations for equity returns are strongly downward biased in a setting of learning and ambiguity aversion therefore an eis well above one can be consistent with estimates of eis well below one fifth ambiguity does not resolve asymptotically finally using realistic model parameters we show that a low risk aversion and a moderate amount of ambiguity are consistent with the equity premium the low interest rate and the excess volatility puzzles

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

evaluating change in objective ambiguous mortality probability valuing reduction in ambiguity size and risk level this article develops a valuation model to evaluate mortality probability changes under objective ambiguity where multiple mortality probabilities are exogenously given we construct the valuation model based on upalpha maxmin expected utility to evaluate the reduction in ambiguity size and risk level as well as estimate the subjects ambiguity attitude our model can bring an interesting policy implication if the subjects are ambiguity averse a reduction in ambiguity size with a constant risk level can increases welfare thus even if risk level cannot be lowered reduction in ambiguity size can also be used as a measure toward increasing welfare our model can empirically estimate this welfare change resulting from the reduction in ambiguity size to demonstrate how our model works we apply it to survey data on a public program that reduces mortality probability in accidents caused by wildlife

trade capital and the transition in central europe the potential for export oriented growth and the impact of official capital injections is assessed for five central european countries in the years 1990 2000 by means of a neoclassical simulation model export growth is essential for the transition to a market oriented economy and the recovery of central europe implying the need for trade liberalization by both the east and the west if this condition is being met satisfactory gdp growth rates appear possible even without external financial support

valuing an investment project using no arbitrage and the alpha maxmin criteria from knightian uncertainty to risk we consider a two period irreversible investment decision problem in which the firm can either invest in period 0 or in period 1 the firm is assumed to be able to specify a set of three scenarios or more but not a probability measure assuming the option to wait is valued with the no arbitrage principle when the firm makes use of the criteria maxmin we show the firm ends up with a known probability measure that assigns a positive probability to three or four scenarios only

woodfuels livelihoods and policy interventions changing perspectives in the 1970s it appeared that fuelwood use was growing rapidly and this could have major adverse impacts on the resource and poor users by the mid 1980s revised assessments indicated that there was less of a problem than had been foreseen and much less of a need for forestry interventions to maintain supplies as a result many of the latter were sharply scaled back additional information and analysis that has become available since the 1980s support the view that there is no need for large scale interventions devoted just to provision of fuelwood however declining access to supplies or markets can raise significant problems in some areas and for particular categories of user growing urban demand for charcoal can also cause local problems in particular in africa the potentials for appropriate forms of intervention are discussed

on endogenous formation of price expectations abstract we study a two period exchange economy with complete financial markets and endogenous borrowing constraints contrary to perfect foresight paradigm we assume that agents are heterogeneous in their ability to forecast future prices we introduce a new equilibrium concept called informationally constrained equilibrium where the formation of price expectations is endogenous and reflects the revelation of information from observing bounds on liabilities designed to ensure solvency at any contingency we prove that under standard assumptions an equilibrium always exists and we characterize the degree of information revealed by the endogenous debt limits

uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation this paper provides what we believe to be the first empirical test of whether investors in the foreign exchange market are uncertainty averse we do this using a heterogeneous agents model in which fundamentalist and chartist beliefs of the exchange rate co exist and are allowed to be either uncertainty neutral or uncertainty averse uncertainty aversion is modelled using the maxmin expected utility approach we find significant evidence of uncertainty aversion in the fx market where in particular fundamentalists are found to be largely uncertainty neutral while chartists are mainly uncertainty averse inclusion of uncertainty averse agents significantly improves the performance of the model

nash equilibrium under knightian uncertainty breaking down backward induction abstract we define nash equilibrium for two person normal form games in the presence of knightian uncertainty using the formalization of schmeidler and gilboa we show that nash equilibrium exists for any degree of uncertainty aversion that maxmin behaviour can occur even when it is not rationalizable in the usual sense and that backward induction breaks down in the twice repeated prisoners dilemma we relate these results to the literature on cooperation in the finitely repeated prisoners dilemma and the literature on epistemological conditions underlying nash equilibrium the knowledge notion implicit in this model of equilibrium does not display logical omniscience journal of economic literature classification numbers c72 d81

choice under uncertainty with the best and worst in mind neo additive capacities the concept of a non extreme outcome additive capacity neo additive capacity is introduced neo additive capacities model optimistic and pessimistic attitudes towards uncertainty as observed in many experimental studies moreover neo additive capacities can be applied easily in economic problems as we demonstrate by examples this paper provides an axiomatisation of choquet expected utility with neo capacities in a framework of purely subjective uncertainty

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

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

political economy of the kyoto protocol the kyoto protocol negotiated in december 1997 is the first international treaty to limit emissions of greenhouse gases but kyoto does not mark the conclusion to international cooperation on climate change it is really just a beginning this paper shows that in the aggregate the benefits of undertaking the kyoto reductions should exceed the corresponding costs provided these are achieved cost effectively but although kyoto seeks to promote cost effectiveness it may yet prove very costly moreover the agreement may not even achieve the reductions that it promises either because emissions will relocate to the countries that are not required to stay within kyoto prescribed ceilings or because paper trades will be promoted by the protocol s mechanisms more fundamentally kyoto does not deter non compliance and it only weakly deters non participation these flaws need to be mended but the nature of the problem makes that an especially difficult task copyright 1998 by oxford university press

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

ambiguity aversion with three or more outcomes abstract ambiguous choice problems which involve three or more outcome values can reveal aspects of ambiguity and ambiguity aversion which cannot be displayed in the classic two outcome ellsberg urn problems and hence are not always captured by models designed to accommodate them these aspects include allais type preferences over purely subjective acts attitudes toward different sources involving different amounts of ambiguity and attitudes toward ambiguity at different outcome levels this paper presents a few such examples and examines the standard models predictions and performance in such cases jel d81

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

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

a precautionary tale of uncertain tail fattening suppose that there is a probability density function for how bad things might get but that the overall rate at which this probability density function slims down to approach zero in the tail is uncertain the paper shows how a basic precautionary principle of tail fattening could then apply the worse is the contemplated damage the more should a decision maker consider the bad tail to be among the relatively fatter tailed possibilities a rough numerical example is applied to the uncertain tail distribution of climate sensitivity

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

welfare improving ambiguity in insurance markets with asymmetric information we consider a model of competitive insurance markets involving both asymmetric information and ambiguity about the accident probability we show that there can exist a full insurance pooling equilibrium we also present an example where an increase in ambiguity leads to a strict pareto improvement higher ambiguity relaxes high risks incentive compatibility constraint and allows low risks to buy more insurance higher ambiguity also deteriorates low risks expected utility from holding an uncertain prospect if the former effect dominates the expected utility of low risks increases and given that high risks utility remains unaffected the increase in ambiguity implies a strict pareto improvement

confronting an unsolvable problem deforestation in malawi abstract in malawi the low price of firewood from customary land is a barrier to reforestation if government were to grow trees and sell them at current firewood prices subsidies would be so great that only a very small part of wood deficits could be met nor will farmers plant enough trees since many other cash crops give higher returns than firewood moreover there is no way to raise the price of firewood to levels where adequate amounts of tree planting would become economic therefore deforestation cannot be reversed under the circumstances the most important obligation is to minimize the damage done to agricultural land as trees disappear this means that all of the relatively few trees planted must fulfill a soil protection function a tree planting strategy based on these realities will be very different from a strategy that assumes the deforestation problem can be solved

measuring energy poverty focusing on what matters abstract the provision of modern energy services is recognised as a critical foundation for sustainable development and is central to the everyday lives of people effective policies to dramatically expand modern energy access need to be grounded in a robust information base metrics that can be used for comparative purposes and to track progress towards targets therefore represent an essential support tool this paper reviews the relevant literature and discusses the adequacy and applicability of existing instruments to measure energy poverty drawing on those insights it proposes a new composite index to measure energy poverty both the associated methodology and initial results for several african countries are discussed whereas most existing indicators and composite indices focus on assessing the access to energy or the degree of development related to energy our new index the multidimensional energy poverty index mepi focuses on the deprivation of access to modern energy services it captures both the incidence and intensity of energy poverty and provides a new tool to support policy making

the effects of imprecise probabilities and outcomes in evaluating investment options vagueness attitudes have been used to explain anomalies and irregularities in investment behavior it is generally assumed ellsberg 1961 that decision makers dms dislike vagueness but this assumption has been challenged by empirical results documenting systematic alternative attitudes to vagueness as a function of its source the domain of the decisions and the response mode used we investigate these three factors in a within subjects design that was embedded in an investment context dms evaluated investment options that varied in terms of their sources of vagueness probabilities and or outcomes in both domains gains or losses and employed two response modes pricing or choice we confirm that individuals vagueness attitudes are malleable contingent on the dimension salience and the reference domain in particular we observed three distinct patterns of reversals of attitudes towards vagueness our results indicate that the ability of vagueness attitudes to predict investment behavior is limited as decisions can be systematically influenced by task context and or perceived gain or loss positions economic models may be improved by incorporating more flexible assumptions about individuals attitudes toward vagueness