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

the knightian uncertainty and the risk premium and the risk free rate puzzles in japan and the u s abstract this paper proposes a new measure for knightian uncertainty under markovian economy and solves the risk premium and the risk free rate puzzle under knightian uncertainty in japan and the u s with plausible values for time preference and risk aversion parameters

arbitrage and existence of equilibrium in infinite asset markets this paper develops a framework for a general equilibrium analysis of asset markets when the number of assets is infinite such markets have been studied in financial economics in the context of asset pricing theories a distinctive feature of an equilibrium model of asset markets is that investors portfolio choice sets are typically not bounded below we prove that an equilibrium exists under a condition that markets are arbitrage free the markets are arbitrage free if there is a price system under which no investor has an arbitrage opportunity the concept of an arbitrage opportunity used in this paper differs from the standard concept on an arbitrage portfolio in financial markets which is a portfolio that guarantees a non negative payoff in every event a positive payoff in some event and has zero price we provide an extensive discussion of concepts of an arbitrage opportunity

optimal investment under ambiguous technology shocks abstract this paper analyzes the behavior of a firm facing an ambiguous technology shock and the effects of the attitude toward ambiguity on optimal capital investment using the smooth ambiguity model of klibanoff et al 2005 although it seems intuitive that an increase in ambiguity aversion always reduces the optimal capital investment this is not necessarily true because the shape of the production function plays a key role in determining the effect under some conditions we show that the optimal amount of capital investment increases decreases in ambiguity aversion if the production function is substitute complement and that this result is counterintuitive when the production function is substitute furthermore our main results hold if we assume the maxmin preferences in ghirardato et al 2004

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

asset allocation with distorted beliefs and transaction costs abstract in this paper we study the problem of the optimal portfolio selection with transaction costs for a decision maker who is faced with knightian uncertainty the decision maker s portfolio consists of one risky and one risk free asset and we assume that the transaction costs are proportional to the traded volume of the risky asset the attitude to uncertainty is modeled by the choquet expected utility we derive optimal strategies and bounds of the no transaction region for both optimistic and pessimistic decision makers the no transaction region of a pessimistic investor is narrower and its bounds lie closer to the origin than that of an optimistic trader moreover under the choquet expected utility the structure of the no transaction region is not necessarily a closed interval as it is under the standard expected utility model

employment and wage strategies of the firm over a business cycle abstract by using control theory we analyze the behaviour of a firm which expects a demand cycle and occupies a monopsonistic position on the labour market consequently the relative wage rate is used as a tool for regulating the flow of applicants and the rate of quits of employees the dynamic wage policy is governed by the demand trend but the marginal propensity of workers to quit and the level of hiring costs are also relevant factors in setting the wage rate the recession period is characterized by a relative wage decrease associated with voluntary quits rather than firing however the wage rate starts increasing when demand is still declining and labour hoarded

adaptive strategies of the firm through a business cycle abstract the paper examines the behaviour of a profit maximizing firm which forecasts a recession and which has at its disposal to regulate its level of equipment and its level of employment three control variables investment recruitment firing the selling price being held constant it shows that i the expectation of a recession by a firm is enough to launch a real recession in the demand for production factors equipment and recruitment ii by comparison with a situation in which the firm may manipulate the selling price price rigidities imply the occurrence of excess capacity in addition they do not allow the firm to delay firing and induce a stronger irregularity in recruitment and firing and iii depending on the characteristics of the firm and of the environment a unique model is compatible with a whole variety of behavioural patterns

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

investment in new activities and the welfare cost of uncertainty abstract recent literature has shown that trade distortions are associated with first order costs stemming from the induced drop in the formation of new activities we demonstrate that uncertainty may induce similar welfare costs and that these costs apply also to a closed economy this argument is illustrated in romer s model of a dependent economy where foreign direct investment is needed to enable the importation of capital goods and intermediate products used in domestic production we show that knightian uncertainty inhibits the formation of new activities leading to first order losses whereas risk aversion alone leads to second order losses

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

arbitrage bubbles and valuation the standard present value rule of asset pricing may fail in financial markets when infinitely many assets can be traded i provide an example of asset payoffs and prices such that prices are arbitrage free and could be equilibrium prices in frictionless markets using valuation theory methods i show that asset prices can be meaningfully decomposed into a fundamental value and a pricing bubble the fundamental value obeys the present value rule

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

detecting money market bubbles the existence of a self financing trading strategy that replicates the money market account at a fixed future date at a lower cost than the current value of this account constitutes a money market bubble mmb understanding whether a market exhibits an mmb is crucial in particular for derivative pricing an mmb precludes the existence of a risk neutral probability measure the benchmark approach allows to study mmbs and is formulated under the real world probability measure it does not require the existence of a risk neutral probability measure using a range of well known stochastic volatility models we study the existence of an mmb in the us economy and find that the us market exhibits an mmb for all models considered that allow it this suggests that for derivative pricing and hedging care should be taken when making assumptions pertaining to the existence of a risk neutral probability measure less expensive portfolios are likely to exist for a wide range of long term derivatives as typical for pensions

innovations in financial services relationships and risk sharing relationships between intermediaries and their customers have become increasingly important in recent years this paper argues that the need for costly ex ante information acquisition and analysis is a major barrier to the participation of investors and firms in sophisticated markets long term relationships between intermediaries and their customers in which intermediaries provide implicit insurance to customers can be an effective substitute for costly ex ante investigation in this way intermediaries allow firms and investors to reap the benefits of financial markets relationships are easiest to sustain when the ongoing benefits to both parties are high as a result competition may lower the benefits that can be obtained from relationships

paralyzed by fear rigid and discrete pricing under demand uncertainty we propose a new theory of price rigidity based on firms knightian uncertainty about their competitive environment this uncertainty has two key implications first firms learn about the shape of their demand function from past observations of quantities sold this learning gives rise to kinks in the expected profit function at previously observed prices making those prices both sticky and more likely to reoccur second uncertainty about the relationship between aggregate and industry level inflation generates nominal rigidity we prove the main insights analytically and quantify the effects of our mechanism our estimated quantitative model is consistent with a wide range of micro level pricing facts that are typically challenging to match jointly it also implies significantly more persistent monetary non neutrality than in standard models allowing it to generate large real effects from nominal shocks

optimal pricing and quality choice of a monopolist under knightian uncertainty abstract this paper analyzes a simple vertical product differentiation model with demand uncertainty and derives a risk neutral monopolist s optimal market entry timing her optimal pricing and optimal quality choice by incorporating knightian uncertainty irreversibility and flexibility in quality enhancing investment into a continuous time stochastic model it is shown that an increase in knightian uncertainty induces decreases in the optimal price the optimal quality and the value of undertaking the quality enhancing investment by the monopolist the social optimal entry timing pricing and quality are also analyzed

on booms that never bust ambiguity in experimental asset markets with bubbles we study the effect of ambiguity on the formation of bubbles and on the occurrence of crashes in experimental asset markets a la smith suchanek and williams 1988 we extend their framework to an environment where the fundamental value of the asset is ambiguous we show that when the fundamental value is ambiguous asset prices tend to be lower than when it is risky although bubbles form in both the ambiguous and the risky environments additionally bubbles do not crash in the ambiguous case whereas they do so in the risky one these findings regarding depressed prices and the absence of crashes in the presence of ambiguity are in line with recent theoretical work stressing the crucial role of ambiguity to account for surprisingly low equity prices high returns as well as herding in asset markets

evolution of erois of electricity until 2050 estimation and implications on prices abstract the eroi for energy returned on invested of an energy technology measures its ability to provide energy efficiently previous studies draw a link between the affluence of a society and the eroi of its energy system and show that erois of renewables are lower than those of fossil fuels logically concerns have been expressed that system wide eroi may decrease during a renewable energy transition first i explain theoretically that the erois of renewables themselves could then decrease as energy efficient fossil fuels would be replaced by less energy efficient renewables in the supply chain then using the multi regional input output model themis i estimate the evolution of erois and prices of electric technologies from 2010 to 2050 for different scenarios global eroi of electricity is predicted to go from 12 in 2010 to 11 in 2050 in a business as usual scenario but down to 6 in a 100 renewable one finally i study the economic implication of a declining eroi an inverse relation between eroi and price is suggested empirically even though theory shows that both quantities may move in the same direction

iq and stock market participation stock market participation is monotonically related to iq controlling for wealth income age and other demographic and occupational information the high correlation between iq and participation exists even among the affluent supplemental data from siblings studied with an instrumental variables approach and regressions that control for family effects demonstrate that iq s influence on participation extends to females and does not arise from omitted familial and nonfamilial variables high iq investors are more likely to hold mutual funds and larger numbers of stocks experience lower risk and earn higher sharpe ratios we discuss implications for policy and finance research

model misspecification and underdiversification in this paper we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification we develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks we find that when the overall ambiguity about the joint distribution of returns is high then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean variance portfolio

arbitrage and the existence of competitive equilibrium a general equilibrium model of markets for commodities and assets is considered the author develops the notion of a price system that admits no arbitrage opportunity and demonstrates the fundamenta l role of this concept for the theory of the existence of a competiti ve equilibrium a price system admits no arbitrage opportunity for a consumer if every bundle of desired commodities has a positive market value the author proves that the existence of a price system that a dmits no arbitrage opportunity for all consumers is sufficient for th e existence of an equilibrium copyright 1987 by the econometric society

liquidity and asset market dynamics this study analyzes economies with an essential role for liquid assets in the exchange process the model can generate multiple stationary equilibria across which asset prices market participation capitalization output and welfare are positively related it can also generate a variety of nonstationary equilibria even when fundamentals are deterministic and time invariant including periodic chaotic and stochastic sunspot equilibria with recurrent market crashes some equilibria have asset price trajectories that resemble bubbles growing and bursting endogenous private and public liquidity is also introduced sometimes it is efficient to provide enough liquid assets to satiate demand other times it is not

the economic growth enigma capital labour and useful energy abstract we show that the application of flexible semi parametric statistical techniques enables significant improvements in model fitting of macroeconomic models as applied to the explanation of the past economic growth since 1900 in us uk and japan the new results demonstrate quite conclusively the non linear relationships between capital labour and useful energy with economic growth they also indicate that output elasticities of capital labour and useful energy are extremely variable over time we suggest that these results confirm the economic intuition that growth since the industrial revolution has been driven largely by declining energy costs due to the discovery and exploitation of relatively inexpensive fossil fuel resources implications for the 21st century which are also discussed briefly by exploring the implications of an aceges based scenario of oil production are as follows a the provision of adequate and affordable quantities of useful energy as a pre condition for economic growth and b the design of energy systems as technology incubators for a prosperous 21st century

ambiguity models and the machina paradoxes daniel ellsberg 1961 constructed counterexamples to show the limitations of leonard j savage s 1954 subjective expected utility seu ellsberg s examples involved a comparison between objective uncertainty risk in which probabilities are known and subjective uncertainty in which they are not the prevailing prefer ence for objective over subjective uncertainty known as ambiguity aversion raised an important paradox for economic theory since ellsberg s classical work many models have been developed to generalize seu in order to accommodate the pref erence for objective over subjective uncertainty in the same manner as ellsberg mark j machina 2009 proposed two examples that falsify one of the seu generalizations david schmeidler s 1989 choquet expected utility ceu this article shows that the impact of machina s examples is not restricted to the model initially targeted his examples pose difficulties not only for ceu but also for the four other most popular and widely used models of ambiguity averse preferences namely maxmin expected utility itzhak gilboa and schmeidler 1989 variational preferences fabio maccheroni massimo marinacci and aldo rustichini 2006 a maxmin paolo ghirardato maccheroni and marinacci 2004 and the smooth model of ambiguity aversion peter klibanoff marinacci and sujoy mukerji 2005 consequently the implications for economics are more pro found than initially thought we also discuss marciano siniscalchi s 2009 vector expected utility veu model which can account for the typical ambiguity averse preferences in machina s examples finally we examine how our results are related to the uncertainty aver sion axiom which is assumed in virtually all commonly used decision models under ambiguity in particular we argue that machina s examples demonstrate that the uncertainty aversion axiom can be overly restrictive in some circumstances the article proceeds as follows section i presents the four models of ambiguity averse preferences which are alternatives to ceu and which are examined in this paper in section ii and iii the implications of machina s examples for these models are presented section iv discusses alternative models and the uncertainty aversion axiom

stochastic dominance pareto optimality and equilibrium asset pricing pricing a factor subspace contains the market portfolio and is such that every marketed contingent claim is second order stochastically dominated by a claim from the factor subspace conditions are given for the existence of equilibrium and it is shown how apt and capm can be interpreted in the framework of the paper if sufficiently many call options on the market portfolio are traded then the space spanned by these options can be used as the factor subspace we consider markets in which a collection of financial assets are traded the collection may be finite or infinite markets are frictionless and short sales of assets are permitted asset payoffs are random variables which are elements of a space of contingent claims by forming portfolios of the marketed assets payoffs in a certain linear subspace of the space of all contingent claims can be attained we call this subspace a space of marketed claims we say that a closed subspace of the space of marketed claims is a factor subspace if two conditions are satisfied first the market portfolio payoff i e the payoff of an aggregate endowment of portfolios per capita belongs to this subspace second every marketed contingent claim is dominated in the sense of second order stochastic dominance by some contingent claim in the factor subspace we demonstrate that for each asset market economy there is a well defined minimal factor subspace in the sense that no proper subspace of it can be a factor subspace if markets are complete i e if a full set of arrow securities are traded then the price of any given asset can be expressed in terms of prices of arrow securities or state prices breeden and litzenberger 1978 have shown that state prices can be replaced by the values of options thus in a complete market asset prices are determined either by state prices or call options it is established in this paper that these ideas and methods are applicable to asset pricing theories even when markets are incomplete making use of the argument of second order stochastic dominance we show that every constrained pareto optimal portfolio allocation consists exclusively of portfolios which generate the factor subspace the same holds for an equilibrium portfolio allocation thus for an economy with a factor subspace only a partial set of arrow securities which is large enough to generate the factor subspace is required to price assets this paper establishes that there exists an equilibrium in which the price of a portfolio equals the price of the dominating portfolio with the same expected return in the factor subspace since the dominating

ambiguity aversion and incompleteness of contractual form subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events in such an instance the decision maker s beliefs are better represented by a set of probability functions than by a unique probability function an ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds the non additive expected utility model allows a formal characterization of such behaviour using this model this paper shows that ambiguity aversion can explain the existence of incomplete contracts the setting for the demonstration is the investment hold up model which has been the focus of much of the recent research on the implications of incomplete contracts

on fragility of bubbles in equilibrium asset pricing models of lucas type abstract in this paper we study the existence of bubbles for pricing equilibria in a pure exchange economy a la lucas with infinitely lived homogeneous agents the model is analyzed under fairly general assumptions no restrictions either on the stochastic process governing dividends distribution or on the utilities possibly unbounded are required we prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion a generic uniqueness result is also given regardless of agent s preferences a few pathological examples of economies exhibiting pricing equilibria with bubble components are constructed finally a possible relationship between our approach and the theory developed by santos and woodford on ambiguous bubbles is investigated the whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models journal of economic literature classification numbers c61 c62 d51 g12

more caution is needed when using life cycle assessment to determine energy return on investment eroi abstract cumulative energy demand ced estimates from life cycle assessments lcas are increasingly used to determine energy return on investment eroi but the difference in indicators can lead to a misclassification of energy flows in the assessment the core idea of eroi is to measure the relation of energy diverted from society to make energy available to society ced on the other hand includes forms of energy that are not appropriated by society such as fugitive methane emissions from oil wells as well as losses of heating value of coal during transport and storage such energy forms should be excluded from eroi failure to do so leads to results that are inconsistent with the intention of eroi and potentially misleading we demonstrate how this problem is at least partially rectifiable by adopting consistent energy accounting but also note that among the energy flows not appropriated by society occurring in ced not all flows can easily be removed further we point to inconsistencies in heating value assumptions in a widely used database that have misled analysts finally we argue that the differential weighting of primary energy forms in published ced based eroi work is unsubstantiated and should be reconsidered

are there rational bubbles in foreign exchange markets evidence from an alternative test abstract this paper employs the kalman filter technique to estimate and test for stochastic bubbles for exchange rates between the us dollar and the british pound the japanese yen and the deutsche mark i find no significant evidence of bubbles my results are in sharp contrast with previous findings on exchange rate bubble testing and cast some doubt on those claims that the dollar exchange rates were driven by speculative bubbles in the post bretton woods period

increasing returns in infinite horizon economies this paper shows that in a general equilibrium model with an infiniite holizonl in whichi productionl may exhibit increasing returns to scale or non conivexities marginal cost pricing equilibria exist anid are essential that is stable witlh respect to small perturbationis of the economily as in many important models of mairket imperfections marginal cost pricinig equilibria need not be pareto optimal in the presence of noni convexities so the systematic approaches to equilibrium analysis in infinite dimenisionial commodity spaces which rely crucially oln the first welfare theorem cainnot be used instead this paper introduces leray schauder degree theory the extension of degree theor y to banacih and locally convex spaces as the natural methodology for showinlg that equilibria exist and for anialyzing qualitative features of equilibria such as local uniqueness or essentiality

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

capital accumulation under technological progress and learning a vintage capital approach abstract in standard capital accumulation models all capital goods are equally productive and produce goods of the same quality however due to technological progress in reality it holds most of the time that newer capital goods are either more productive process innovation or produce goods of better quality product innovation implications of process innovation for the firm s investment policies are investigated while the output price development is subject to a business cycle and a given generation of capital goods gets more productive over time due to learning the problem is turned into an optimal control model that distinguishes the vintages of capital goods and where unlike most of the recent contributions it is possible to keep on investing in older technologies it is shown that i learning is one of the reasons why a firm may invest in old technologies even when apparently superior technologies are available ii investments in machines of a given age increase more over time under faster technological progress iii under faster technological progress investments are more vulnerable to output price developments and iv on average machines are older during recessions in deciding whether to invest in newer or older capital goods also the lower productivity due to aging versus differences in cost of discounting and acquisition have to be taken into account

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

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

confidence and the real value of money in an overlapping generations economy we demonstrate that stochastic bubbles which have a constant exogenous probability of collapsing may exist in general equilibrium on an intrinsically useless and unbacked asset money this may happen provided that the probability q that the bubble will persist next period is large enough and exceeds a threshold level q which we call the minimum rate of confidence this condition is always violated when the economy without bubble is dynamically efficient it is more likely to be satisfied in dynamically inefficient economies the larger the size of the inefficiency as measured by the excess of the growth rate over the no bubble interest rate we study both exchange and production economies

pension plan funding technology choice and the equity risk premium in this paper the impact of lazear contracts with defined benefit pensions on aggregate technology composition and the aggregate risk premium is examined in the presence of capital market constraints affecting workers defined benefit pensions bias the economy towards risk free production leveraging the risky technology relaxes the constraints and results in more risky production and a fall in the aggregate risk premium this effect holds with risky debt and low pension shortfall risk but breaks down with high pension shortfall risk a key prediction is that as lazear contracts become less common risky production will increase and the aggregate risk premium will fall

savage in the market we develop a behavioral axiomatic characterization of subjective expected utility seu under risk aversion given is an individual agent s behavior in the market assume a finite collection of asset purchases with corresponding prices we show that such behavior satisfies a revealed preference axiom if and only if there exists a seu model a subjective probability over states and a concave utility function over money that accounts for the given asset purchases

status quo bias multiple priors and uncertainty aversion motivated by the extensive evidence about the relevance of status quo bias both in experiments and in real markets we study this phenomenon from a decision theoretic prospective focusing on the case of preferences under uncertainty we develop an axiomatic framework that takes as a primitive the preferences of an agent for each possible status quo option and provide a characterization according to which the agent considers a full dimensional set of possible priors and abandons her status quo option only if she finds an alternative that returns a higher expected utility for each of these priors we then show that in this framework the very presence of a status quo induces the agent to be more uncertainty averse than she would be without a status quo option

food scares in an uncertain world we develop a model that explains the stylized facts of food scares an immediate and sharp decline in consumption of the product followed by a slow and frequently partial recovery of demand after the scare passes the model is used in conjunction with the natural experiment afforded by the mad cow crisis to elicit empirical information on decision makers perception of uncertainty our theoretical and quantitative results suggest that observed behavior is consistent with sharp changes in beliefs and the presence of knightian uncertainty as measured by the degree of imprecision in our model

a unified beta pricing theory abstract this paper derives ross s mutual fund separation theory and a new equilibrium version of ross s arbitrage pricing theory as special cases of a general theory the paper also reveals that the two theories are identical in their predictions of asset prices and portfolio returns the capital asset pricing model a restricted case of the mutual fund separation theory receives special treatment

quasi equilibria for growth economies abstract we find preferences that discount utility from future consumption yet violate the standard growth condition in representative agent endowment economies such economies have no competitive equilibria but have quasi equilibria the supporting price systems include a type of speculative bubble

eroi of different fuels and the implications for society abstract all forms of economic production and exchange involve the use of energy directly and in the transformation of materials until recently cheap and seemingly limitless fossil energy has allowed most of society to ignore the importance of contributions to the economic process from the biophysical world as well as the potential limits to growth this paper centers on assessing the energy costs of modern day society and its relation to gdp our most important focus is the characteristics of our major energy sources including each fuel s energy return on investment eroi the eroi of our most important fuels is declining and most renewable and non conventional energy alternatives have substantially lower eroi values than traditional conventional fossil fuels at the societal level declining eroi means that an increasing proportion of energy output and economic activity must be diverted to attaining the energy needed to run an economy leaving less discretionary funds available for non essential purchases which often drive growth the declining eroi of traditional fossil fuel energy sources and the effect of that on the world economy are likely to result in a myriad of consequences most of which will not be perceived as good

diversification and equilibrium in securities markets abstract diversification is the strategy of investing small fractions of wealth in each of a large number of securities and thereby reducing risk the basic argument in support of diversification is an appeal to the law of large numbers a portfolio in which an investor s wealth is invested in equal fractions in each ofnsecurities with i i d returns has a return that converges to a riskless return asnincreases indefinitely any risk averse investor would prefer the limit riskless return to the return of any portfolio in this paper we use the space ba of all finitely additive signed measures on the set of natural numbers the index set for securities to model the set of portfolios from which an investor may choose this portfolio space contains arbitrary finite portfolios and a nontrivial portfolio which is the limit of the sequence of portfolios having the fraction of wealth 1 ninvested in each ofnsecurities we identify a class of portfolios which we call perfectly diversified these portfolios are described by purely finite additive measures in a perfectly diversified portfolio wealth invested in each individual security is a negligible fraction of the total wealth of the portfolio we show that the return of every perfectly diversified portfolio of securities with uncorrelated returns is riskless it is shown that modeling of the portfolio space as the space ba makes possible a rigorous derivation of a general equilibrium version of the arbitrage pricing theorem apt the apt provides a good illustration of the implications of diversification for equilibrium prices of securities journal of economic literatureclassification numbers d52 g20

the market for sweepstakes this paper studies the market for monopolistically supplied sweepstakes we derive equilibrium demands for fixed prize and variable prize sweepstakes and determine the profit maximizing prize level and pay out ratio respectively it can be profitable to offer each type of sweepstake when there is a large enough number of weighted utility consumers who have constant absolute risk attitudes are strictly averse to small as well as symmetric risks and display longshot preference behaviour moreover for the variable prize sweepstake the supplier will generally find it profitable to combine sweepstakes targeting two smaller populations and offer a single sweepstake to the combined population this implication is corroborated by the recent spate of mergers of smaller state lotteries into larger ones

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

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

applying regret theory to investment choices currency hedging decisions we apply regret theory an axiomatic behavioral theory to derive closed form solutions to optimal currency hedging choices investors experience regret of not having chosen the ex post optimal hedging decision hence investors anticipate their future experience of regret and incorporate it in their objective function we derive a model of financial decision making with two components of risk traditional risk volatility and regret risk we find results that are in sharp contrast with traditional expected utility loss aversion or disappointment aversion theories we discuss the empirical implications of our model and its ability to explain observed hedging behavior

general equilibrium wariness and efficient bubbles abstract wary consumers overlook gains but not losses in remote sets of dates or states as preferences are upper but not lower mackey semi continuous bewley s 1972 4 result on existence of equilibrium whose prices are not necessarily countably additive holds wariness is related to lack of myopia and to ambiguity aversion and therefore to bewley s 1986 6 work on knightian uncertainty wary infinite lived agents have weaker transversality conditions allowing them to be creditors at infinity and for bubbles to occur in positive net supply assets completing the markets there are efficient allocations that can only be implemented with asset bubbles

arbitrage martingales and bubbles abstract viability of security prices implies linear valuation of payoffs but if there exist an infinite number of securities or trading dates does not imply the existence of a risk neutral probability since countable additivity may fail an example is given

considering only first order effects how simplifications lead to unrealistic technology optimism in climate change mitigation this article challenges the notion that energy efficiency and clean energy technologies can deliver sufficient degrees of climate change mitigation by six arguments not widely recognized in the

optimism and pessimism in games this paper considers the impact of ambiguity in strategic situations it extends the earlier literature by allowing for optimistic responses to ambiguity ambiguity is modelled by ceu preferences we propose a new solution concept for players who may express ambiguitypreference then we study comparative statics of changes in ambiguity attitude in games with strategic complements this gives a precise statement of the impact of ambiguity on economic behaviour

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

risk versus ambiguity and international security design abstract we study portfolio allocation and characterize contracts issued by firms in the international financial market when investors exhibit ambiguity aversion and perceive ambiguity in assets issued in foreign locations increases in the variance of their risky production process cause firms to issue assets with a higher variable payment equity hikes in investors perceived ambiguity have the opposite effect and lead to less risk sharing entrepreneurs from capital scarce countries finance themselves relatively more through debt than equity they are thus exposed to higher volatility per unit of consumption the expected returns on capital invested in capital scarce countries may also be lower such results do not hold in the absence of ambiguity that is when investors only perceive risk new facts uncovered from cross country firm level data are consistent with our model

sequential two player games with ambiguity if players beliefs are strictly non additive the dempster shafer updating rule can be used to define beliefs off the equilibrium path we define an equilibrium concept in sequential two person games where players update their beliefs with the dempster shafer updating rule we show that in the limit as uncertainty tends to zero our equilibrium approximates bayesian nash equilibrium by imposing context dependent constraints on beliefs under uncertainty

on the different notions of arbitrage and existence of equilibrium in this paper we first prove an equilibrium existence theorem for finite dimensional economies with unbounded below consumption sets we only assume that the individually rational utility set is compact and use the demand approach instead of the standard negishi s approach we next compare the different concepts of no arbitrage that have been used in the literature and give conditions for equivalence between absence of arbitrage and existence of equilibrium lastly we introduce the concept of strong unbounded arbitrage and show that the absence of strong unbounded arbitrage implies the compactness of the individually rational utility set journal of economic literature classification numbers c62 d50

endogenous discounting wariness and efficient capital taxation abstract when the discount factors that infinite lived consumers use at each date are not predetermined but are instead chosen within some set depending on what the consumption plan is impatience might not hold more precisely if the utility is the infimum of discounted utilities over that set of discount factor sequences then preferences may be just upper semi impatient such lack of lower semi impatience which we refer to as wariness consists in neglecting distant gains but not distant losses examples are the precautionary case a concern with the worst lifetime outcome and the habit persistence case a concern with a fall in living standards the implementation of efficient allocations by trading assets sequentially requires taxes that avoid excessive savings by raising the opportunity of cost of saving up to the point of matching the marginal benefit of dishoarding at distant dates taxes on equilibrium plans are zero in many contexts

limited participation and consumption saving puzzles a simple explanation and the role of insurance in this paper we show that the existence of a large negative wealth shock and insufficient insurance against such a shock could explain both the limited stock market participation puzzle and the low consumption high savings puzzle we then conduct an empirical analysis on the relation between household portfolio choices and access to private insurance and various types of government safety nets the empirical results demonstrate that a lack of insurance against large negative wealth shocks is positively correlated with lower participation rates and higher saving rates overall the evidence suggests an important role of insurance in household investment and savings decisions

bubbles and constraints on debt accumulation it is commonly thought tirole econometrica 50 1982 1163 1182 that bubbles cannot occur in deterministic sequential market economies with a finite number of infinitely lived agents this paper shows that the constraint on debt accumulation which make possible the existence of equilibrium can cause bubbles if agents face a wealth constraint bubbles can exist if and only if the assest is in zero net supply if agents face exogenous short sales constraints bubbles can exists if and only if some agent s endowment grows at a rate larger than the rate of return and the short sales constraint binds that agent infinitely often

on recalls layoffs variable hours and labor adjustment costs abstract the paper analyzes the employment policy of a firm that can vary both hours and the level of employment the analysis differs from previous work in the adjustment cost literature in that the firm is able to change its employment not only through hires layoffs and quits but also by recalls of employees who were previously laid off thus we introduce the possibility of the firm inventorying the labor input it is shown that this labor inventory potential is necessary if the firm is to ever lay off workers further it is demonstrated that linear rather than strictly convex adjustment costs are then required if the firm is to always recall employees who were previously laid off prior to hiring new workers

bubbles and charges the definitions of fundamental value and speculative bubbles that are standard in macroeconomics and finance are given formal representations as the countably additive part and the purely finitely additive part a measure and a pure charge respectively of the supporting price system when the commodity space is lx examples illustrate that rational bubbles can occur in standard general equilibrium models with complete markets and a finite number of agents even in the absence of uncertainty consider an economy which includes securities or capital goods which are claims to cash flows over countably infinite time and also includes markets for all goods conduct the following thought experiment for each security add the present value of the first n elements of the cash flow and take the limit as n gets large this limit represents the fundamental value of the security the difference if any between the price of the security and its fundamental value is termed a speculative bubble this use of the terms fundamental and speculative bubble is we believe one of those that are generally accepted blanchard and fischer 1989 pp 218 221 for example used the terms precisely in this way yet confusion persists about what factors generate bubbles fads and irrationality have always figured prominently and the hypothesis that these factors are important has gained some empirical support from the literature on asset price volatility another bubbleproducing factor is the structure of information in the market in a partialequilibrium setting allen and gorton 1988 showed that rational bubbles can exist with a finite number of agents who have asymmetric information although fads and asymmetric information can undeniably produce bubbles here we focus exclusively on the phenomenon of speculative bubbles in general equilibrium models with optimizing agents rational expectations and symmetric information an important source of confusion we believe is that the term fundamental is used in connection with sunspot equilibria as well as bubble equilibria a sunspot equilibrium is one in which prices and allocations depend on irrelevant sunspots as well as exogenous variations in fundamentals preferences technology and endowments bubbles on this usage reflect the effect of extrinsic uncertainty on equilibrium prices and allocations this use of the term fundamental in connec

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

existence of equilibrium in capm abstract in the mean variance capital asset pricing model capm non monotonicity of preferences may lead to satiation and short selling as well as satiation may lead to non existence of equilibrium this paper identifies several sets of sufficient conditions for equilibrium to exist the nature of the central conditions is to impose bounds on the investors degree of risk aversion as measured by the marginal rate of substitution between mean and standard deviation of return these bounds do not need to hold globally but only in a relevant range of portfolios or combinations of mean and standard deviation