efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

ex ante incentive efficient trading mechanisms without the private valuation restriction abstract the private valuation assumption found in most trading mechanism design papers rules out markets whose valuation structure generates externalities between traders this paper characterizes the set of ex ante incentive efficient trading mechanisms for a large class of markets that do admit such externalities and for bilateral trade markets establishes the impossibility of a first best solution across a class of trading problems employing uniform priors and linear valuation structures this paper also compares levels of market efficiency for varying numbers of traders

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

the design of ambiguous mechanisms this paper considers a mechanism design framework that is standard except for the agents preferences which exhibit ambiguity aversion in the sense of gilboa and schmeidler 1989 we show that in this framework the optimal strategic form mechanism is an ambiguous mechanism an ambiguous mechanism specifies a message space and a set of outcome functions after showing that a version of the revelation principle holds in our environment we give an exact characterization of the smallest optimal ambiguous mechanism for the single agent case if the type set is composed of n finite elements then the smallest optimal ambiguous mechanism contains n 1 outcome functions we show how the extra revenue that the designer obtains by employing an ambiguous mechanism as opposed to a standard non ambiguous mechanism depends on the parameters of the model in particular we prove that the share of the surplus that the designer can extract from the agent increases as the type set becomes larger and the probability of each single type decreases in the limiting case where the agent s type is drawn from a nonatomic distribution on an interval the optimal ambiguous mechanism extracts all the rent from the agent

existence of equilibrium in single and double private value auctions we show existence of equilibria in distributional strategies for a wide class of private value auctions including the first general existence result for double auctions the set of equilibria is invariant to the tie breaking rule the model incorporates multiple unit demands all standard pricing rules reserve prices entry costs and stochastic demand and supply valuations can be correlated and asymmetrically distributed for double auctions we show further that at least one equilibrium involves a positive volume of trade the existence proof establishes new connections among existence techniques for discontinuous bayesian games

backward incidence of pollution damage compensation policy abstract the backward incidence of higher rates of compensation paid for damage on a factor of production is examined in a two sector three factor model with a linear pollution damage function on labour endowment the results implied by the stolper samuelson theorem are obtained with a consequent decrease in pollution and national income provided that the polluting and nonpolluting sectors are respectively intense in capital and labour and the complement relation between pollution and labour are assumed a geometric interpretation of the results is also provided

strategic liquidity supply and security design we study how securities and issuance mechanisms can be designed to mitigate the adverse impact of market imperfections on liquidity in our model asset owners seek to obtain liquidity by selling claims contingent on privately observed future cash flows liquidity suppliers can be competitive or strategic in the optimal trading mechanism associated to an arbitrary given security issuers with low cash flows sell their entire holdings of the security while issuers with high cash flows are typically excluded from trade by designing the security optimally issuers can avoid exclusion altogether we show that the optimal security is debt because of its low informational sensitivity debt mitigates the adverse selection problem furthermore by pooling all issuers with high cash flows debt also reduces the ability of a monopolistic liquidity supplier to exclude them from trade in order to better extract rents from issuers with lower cash flows

rational hegemons excludable goods and small groups an epitaph for hegemonic stability theory in defining international free trade as a public good hegemonic stability theory posited early in the 1970s that its reliable supply depended upon a distribution of international power analogous to that within a privileged group more recently however critics have challenged three assumptions fundamental to hegemonic theory its premises of free trade public goods and privileged groups they have concluded that hegemony is not necessary for and indeed may be antithetical to a stable world economy based on market exchange the author argues that the critics overstate their case the assumptions they attack allow hegemonic theory to represent analytically several critically important barriers to free trade among states among these are the existence of strategic interdependence among the actors and the prevalence of informational asymmetries the most significant flaw in hegemonic theory is its neglect of the essence of the domain to which it applies the politics of inter state trade in an anarchic world

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

robust bidding and revenue in descending price auctions abstract we study the properties of dutch auctions in an independent private value setting where bidders face uncertainty over the type distribution of their opponents and evaluate their payoffs by the worst case from a set of probabilistic scenarios in contrast to static auction formats participants in the dutch auction gradually learn about the valuations of other bidders we show that the transmitted information can lead to changes in the worst case distribution and thereby shift a bidder s payoff maximizing exit price over time we characterise the equilibrium bidding function in this environment and show that the arriving information leads bidders to exit earlier at higher prices as a result the dutch auction systematically generates more revenue than the first price auction

the principal agent relationship with an informed principal ii common values in many circumstances a principal may have relevant private information when she proposes a contract to an agent we analyze such a principal agent relationship as a noncooperative game the principal proposes a contract which is accepted or rejected by the agent who for most of our analysis has no private information the contract is executed if accepted otherwise the reservation allocation takes effect this allocation may be determined by a pre existing contract which the principal by her proposal is attempting to renegotiate or it may simply be the no trade point in this paper we assume that the principal s information directly affects the agent s payoff before solving the game we discuss pareto efficiency with asymmetric information we define an incentive compatible allocation to be weakly interim efficient wie if there exists no alternative incentive compatible allocation that both parties prefer for all possible beliefs that the agent might have about the principal s private information type we show that any wie allocation is interim efficient ie for some beliefs the rothschild stiglitz wilson rsw allocation relative to the reservation allocation l is the allocation that maximizes the payoff of each type of principal within the class of incentive compatible allocations that guarantee the agent at least the utility he gets from a irrespective of his beliefs about the principal s type the equilibrium set of the contract proposal game consists of the allocations that weakly pareto dominate the rsw allocation thus there is a unique equilibrium outcome if and only if the latter is ie and the equilibrium outcome is the rsw allocation itself after characterizing the equilibrium allocations we study those that are renegotiation proof when either the principal or the agent leads the renegotiation we then compare our contract proposal game which is a signaling model with its screening counterpart we conclude by extending our results to the case in which the agent as well as the principal has private information under the assumption of quasi linear preferences

gulliver untied entry deterrence under unipolarity that the anarchic system generates incentives for states to balance each other s power is conventional wisdom in international relations as such the contemporary unipolar system is an anomaly observers explain its existence in several ways including the benevolence of us hegemony and the constraints international institutions impose on the exercise of us power none of them however explain what is perhaps the most puzzling outcome of the soviet collapse the decision of the united states to maintain its level of military spending to explain its choice we extend the seminal argument waltz advanced long ago to a dynamic setting using a simple model we show that the interest of the unipole in deterring a challenge to its power can induce it to continue to invest in guns rather than to shift its resources to the production of butter this strategy can enable the incumbent unipole to pre empt the balancing process that has long been thought to be central to state survival under anarchy

on the failure of core convergence in economies with asymmetric information in interim economies with asymmetric information we show that the coarse core of wilson 1978 does not converge to price equilibrium allocations as the economy is replicated this failure of core convergence is a basic consequence of asymmetric information and extends to any reasonable notion of either interim core or price equilibrium

optimal domestic regulation under asymmetric information and international trade a simple general equilibrium approach we investigate the design of domestic incentive regulations in a small economy opened to trade and its implications for international specialization and for trade openness to remain welfare improving more specifically we append to an otherwise standard 2 2 heckscher ohlin model of a small open economy a continuum of intermediate sectors producing nontradable goods used in tradable sectors those goods are produced by privately informed regulated firms asymmetric information induces distortions with general equilibrium impacts the small economy becomes relatively richer in the informationally sensitive factor so that asymmetric information might reverse trade patterns free trade is pareto dominated by autarky when it exacerbates agency distortions

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

differential payments within a bidder coalition and the shapley value bidder coalitions at english auctions frequently distribute collusive gains among members via a secondary auction or knockout when coalition members are sufficiently heterogeneous nested coalition structures are observed in which a knockout is conducted at each level of nesting the nested knockout s characteristics are investigated within many settings we find that the expected payments to coalition members via the nested knockout equal the shapley value incentive compatibility problems of the nested knockout are also analyzed

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

all stage strong correlated equilibrium abstract a strong correlated equilibrium is a strategy profile that is immune to joint deviations different notions of strong correlated equilibria were defined in the literature one major difference among those definitions is the stage in which coalitions can plan a joint deviation before ex ante or after ex post the deviating players receive their part of the correlated profile in this paper we show that an ex ante strong correlated equilibrium is immune to deviations at all stages thus the set of ex ante strong correlated equilibria of moreno wooders games econ behav 17 1996 80 113 is included in all other sets of strong correlated equilibria

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

incentive schemes as a signaling device abstract this paper considers a model of moral hazard where the principal has private information for instance in an organizational setting the firm may be better informed about the profitability of a sales area for which it seeks to employ a new sales representative we show how this information asymmetry may lead to a game of signaling which can mute incentives

trade with heterogeneous prior beliefs and asymmetric information no trade theorems have shown that new information will not lead to trade when agents share the same prior beliefs this paper explores the structure of no trade theorems with heterogeneous prior beliefs it is shown how different notions of efficiency under asymmetric information ex ante interim ex post are related to agents prior beliefs as well as incentive compatible and public versions of those efficiency concepts these efficiency results are used to characterize necessary and sufficient conditions on agents beliefs for no trade theorems in different trading environments

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

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

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

powerful pacifists democratic states and war democracies are less likely to fight wars with each other they are also more likely to prevail in wars with autocratic states i offer an explanation of this syndrome of powerful pacifism drawn from the microeconomic theory of the state state rent seeking creates an imperialist bias in a country s foreign policy this bias is smallest in democracies where the costs to society of controlling the state are relatively low and greatest in autocracies where the costs are higher as a result of this bias autocracies will be more expansionist and in turn war prone in their relations with each other where the absence of this imperialist bias is manifest the relative pacifism of democracies appears in addition democracies constrained by their societies from earning rents will devote greater absolute resources to security enjoy greater societal support for their policies and tend to form overwhelming countercoalitions against expansionist autocracies it follows that democracies will be more likely to win wars

interim third party selection in bargaining abstract third party intervention can reduce the risk of conflict in situations where the bargaining failure is due to asymmetric information in this paper i consider the selection of a third party in a two person bargaining problem where each disputant has private information about its relative strength or weakness for a class of problems i find that the disputants choose the third party that is best for the strong type but worst for the weak type due to the incentive of each disputant to avoid seeming weak to their adversary the selected third party s intervention entails a higher ex ante chance of conflict than intervention by any other alternative this paper shows how the process of interim third party selection can have important consequences for the outcome of a third party intervention in bargaining

gifts as economic signals and social symbols gift giving has often puzzled economists especially because efficient gifts like cash or giving exactly what a person asks for seem crass or inappropriate it is shown in a formal game theoretic model that gifts serve as signals of a person s intentions about future investment in a relationship and inefficient gifts can be better signals other explanations for the inefficiency of gift giving are advanced and some stylized facts about gift giving practices are described many of which are consistent with the signaling view of gifts

trade and the distribution of economic well being in an economy with local public goods abstract this paper models a small open economy containing many identical communities and two types of workers who are perfectly mobile across communities but not internationally competitive firms produce two tradable private goods and local governments provide residents with a single public good trade patterns differ across communities in equilibrium this observation is used to prove a modified version of the stolper samuelson theorem simply stated workers who are relatively concentrated in those communities that export a given good gain from a rise in the relative price of this good whereas the other workers lose

optimal robust bilateral trade risk neutrality a risk neutral seller and buyer with private information bargain over an indivisible item we prove that optimal robust bilateral trade mechanisms are payoff equivalent to non wasteful randomized posted prices

implementation under ambiguity abstract we introduce the idea of implementation under ambiguity in particular we study maximin efficient notions for an ambiguous asymmetric information economy i e economies where agents preferences are maximin a la wald 1950 the interest on the maximin preferences lies in the fact that maximin efficient allocations are always incentive compatible de castro and yannelis 2009 a result which is false with bayesian preferences a noncooperative notion called maximin equilibrium is introduced which provides a noncooperative foundation for individually rational and maximin efficient notions specifically we show that given any arbitrary individually rational and ex ante maximin efficient allocation there is a direct revelation mechanism that yields the efficient allocation as its unique maximin equilibrium outcome thus an incentive compatible individually rational and efficient outcome can be reached by means of noncooperative behavior under ambiguity

stability and the distribution of power the relation between stability and the distribution of power is an important and long debated problem in international relations theory the balance of power school argues that an even distribution of power is more stable while the preponderance of power school argues that a preponderance of power is more stable empirical efforts to estimate this relation have yielded contradictory results this essay examines the relation between stability and the distribution of power in an infinite horizon game theoretic model in which two states are bargaining about revising the international status quo the states make offers and counteroffers until they reach a mutually acceptable settlement or until one of them becomes so pessimistic about the prospects of reaching an agreement that it uses force to impose a new settlement the equilibrium of the game contradicts the expectations of both schools and offers an explanation for the conflicting empirical estimates in the model stability is greatest when the status quo distribution of benefits reflects the expected distribution of benefits that the use of force would impose

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

efficiency enhancing signalling in the samaritan s dilemma suppose an altruistic person a is willing to transfer resources to a second person b if b comes upon hard times if b anticipates that a will act in this manner b will save too little from both agents point of view this is the samaritan s dilemma this paper shows that the undersaving result is mitigated if we relax the standard assumption of complete information because if a is uncertain about how big b s need for support is b will have an incentive to signal that he is in great need by saving more than he otherwise would have done

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

ex ante efficient ex post individually rational trade abstract consider a bilateral trade model with two sided incomplete information for a general set of independent beliefs an ex post individually rational mechanism generating the same level of ex ante expected gains from trade as an ex ante efficient interim individually rational mechanism is constructed thus imposing the stronger notion of ex post individual rationality on this mechanism design problem generates no loss of efficiency

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

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

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

perfect competition in asymmetric information economies compatibility of efficiency and incentives the idea of perfect competition for an economy with asymmetric information is formalized via an idiosyncratic signal process in which the private signals of almost every individual agent can influence only a negligible group of agents and the individual agents relevant signals are essentially pairwise independent conditioned on the true states of nature thus there is no incentive for an individual agent to manipulate her private information the existence of incentive compatible ex post walrasian allocations is shown for such a perfectly competitive asymmetric information economy with or without common values consequently the conflict between incentive compatibility and pareto eciency is resolved exactly and its asymptotic version is derived for a sequence of large but finite private information economies

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

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

the equivalence of lending equilibria and signalling based insurance under asymmetric information i present a model in which a continuum of individuals have stochastic idiosyncratic income shocks complete insurance is physically feasible but unattainable due to an information asymmetry income shocks are observable only by the individuals receiving them any insurance institution must therefore rely on self reporting of income innovations two ways of achieving incentive compatible self reporting are presented the first is a debt market with an explicit lending restriction the second is an insurance contract that linearly filters a signal transmitted by individuals the two are then demonstrated to be identical equilibrium consumption fluctuates in a random walk which is inefficient given the physical potential for complete insurance but is efficient given the information constraints the results are complementary to those of green 1987 but permit more general stochastic processes of income to be analyzed serial correlation of income reduces the efficiency of the insurance

heterogeneous preferences and equilibrium trading volume abstract the representative agent lucas model stresses aggregate risk and hence does not allow us to study the impact of agents heterogeneity on the dynamics of equilibrium trading volume in this paper we investigate under what conditions non informational heterogeneity i e differences in preferences and endowments leads to nontrivial trading volume in equilibrium we present a non informational no trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous time lucas market model with heterogeneous agents multiple goods and multiple securities we explain in detail how no trade equilibria are related to autarky equilibria portfolio autarky equilibria and peculiar financial market equilibria which play an important role in the literature on international risk sharing

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

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

introduction unipolarity state behavior and systemic consequences the united states emerged from the 1990s as an unrivaled global unipolar state this extraordinary imbalance has triggered global debate governments and peoples around the world are struggling to understand to how an american centered unipolar system operates and to respond to it what is the character of domination in a unipolar distribution to what extent can a unipolar state translate its formidable capabilities into meaningful influence will a unipolar world be built around rules and institutions or be based more on the unilateral exercise of unipolar power scholars too are asking these basic questions about unipolarity and international relations theory the individual contributions develop hypotheses and explore the impact of unipolarity on the behavior of the dominant state on the reactions of other states and on the properties of the international system collectively they find that unipolarity does have a profound impact on international politics international relations under conditions of unipolarity force a rethinking of conventional and received understandings about the operation of the balance of power the meaning of alliance partnerships the logic of international economic cooperation the relationship between power and legitimacy and the behavior of satisfied and revisionist states

efficient contracting with reliance and a damage measure this article reexamines the problem of breach of contract studied by shavell 1980 1984 and rogerson 1984 by considering explicitly the incentive problems that arise from asymmetric information and transaction specific investment we derive the optimal contract which consists of variable price and damage payment schedules each of which is set before any private information is observed we show that the optimal contract attains full classical efficiency

international trade with a public intermediate good abstract the purpose of this paper is to investigate familiar trade theorems such as the stolper samuelson samuelson rybczynski heckscher ohlin and factor price equalization theorems when a public intermediate good is accommodated in the 2 2 general equilibrium trade model the public good which is introduced by the lindahl pricing rule is assumed to be of a semipublic kind then we present the circumstances where the positive results for all of the above theorems except the factor price equalization theorem hold as for factor price equalization we show that there is a tendency for trade to equalize prices

public goods with ambiguity in large economies abstract we consider a canonical problem in economics the financing and provision of a public good mailath and postlewaite 1990 show that under natural information and enforcement frictions the probability of providing the public good falls to zero as the population size goes to infinity even if provision of the public good is efficient in this paper we allow agents to have multiple prior beliefs about others valuations and to make choices that reflect their aversion to that ambiguity we show that as long as each agent s set of priors contains some distribution of valuations under which provision is inefficient it is possible to find a mechanism in large economies that finances provision of the public good

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

history dependent paths and trade gains in a small open economy with a public intermediate good this study reexamines mcmillan s international economic review 19 1978 665 78 analysis of a dynamic small open economy with a public intermediate good concerning the trade patterns of the open economy we find results that were overlooked in mcmillan s analysis among others if labor endowment is of intermediate size there are two saddle point steady states and the initial stock of the public good determines the long run trade pattern we also add a gains from trade analysis to mcmillan s model and demonstrate that if the economy has a comparative advantage in a good with productivity less sensitive to the public intermediate good the economy may lose from trade at the steady state

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

strategy proof stochastic assignment abstract i study strategy proof assignment mechanisms where the agents reveal their preference rankings over the available objects a stochastic mechanism returns lotteries over deterministic assignments and mechanisms are compared according to first order stochastic dominance i show that non wasteful strategy proof mechanisms are not dominated by strategy proof mechanisms however non wastefulness is highly restrictive when the mechanism involves randomization in fact the random priority mechanism i e the random serial dictatorship and a recently adopted school choice mechanism deferred acceptance with random tie breaking are wasteful i find that both these mechanisms are dominated by strategy proof mechanisms in general strategy proof improvement cannot be due to merely reshuffling objects and therefore must involve assigning more objects

ambiguous beliefs and mechanism design abstract this paper develops a payoff equivalence theorem for mechanisms with ambiguity averse participants with preferences of the maxmin expected utility meu form gilboa and schmeidler 1989 we use our payoff equivalence result to explicitly characterize the revenue maximizing private value auction mechanism for agents with arbitrary forms of ambiguous beliefs we also show that the revenue ranking between first and second price auctions is sensitive to the form of ambiguity aversion our payoff equivalence techniques allow us to study the constrained efficient budget balanced bilateral trade mechanism and show that increased ambiguity improves the efficiency of the mechanism in addition we characterize the revenue maximizing efficient bilateral trade mechanism and show that heightened ambiguity lowers ex ante budget deficits

reputational comparative advantage and multinational enterprise 1 introduction when cultivating a new export market or attempting to expand its share of an existing market an exporter is likely to find that it has been preceded by its reputation minus a readily identifiable brand name quality reputation may solely reflect the country of origin for example when consumers are presented with a large amount of complex product information they may use the country of origin as a heuristic in forming product impressions without considering other product attributes 1 in this article i show that this heuristic decision making process can affect a firm s quality decision and can therefore become self fulfilling hence any bias that consumers have may be well founded however it is only correct because firms respond rationally to it colombia s garment industry provides an interesting example of a self fulfilling unfavorable quality reputation in international trade as described by morawetz 1981 a single colombian garment firm took a contract for 50 000 men s suits that was beyond its capability the poor quality result so tarnished the american importer s name that other high quality importers become wary of colombian sewn garments with the payoff to high quality production reduced colombian garment firms then concentrated on low quality markets and the newly found unfavorable reputation was justified in the model constructed here consumers see only a noisy signal of the product s quality at the time of purchase therefore their posterior beliefs are based on this noisy signal and the country of origin reputations as will be made clear higher quality firms benefit more from an increase in their country s reputation so that a better reputation generates an increase in the percentage of high quality firms in this way the reputation becomes self fulfilling and ex ante identical countries can be correctly perceived as differing in their percentage of high quality producers i next introduce an economy with two sectors one sector produces more complex goods where high quality is not easily verified and is more essential to the product s performance these may be technology intensive products or they may consist of the design and marketing of the goods produced in the other sector in particular high quality production costs and the consumer s value for high quality goods is greater in this sector i show that this sector becomes more profitable as the country of origin reputation increases hence if one country s equilibrium reputation is low and the other country s equilibrium reputation is high then the pattern of specialization and international trade can be determined solely by reputational comparative advantage 2 finally i show that reputational comparative advantage can overshadow a small technological comparative disadvantage in determining the pattern of international trade given this pattern of trade and specialization based on reputational comparative advantage a high reputation firm may expend resources to establish a multinational enterprise mne in the low reputation country for example many mne products require the differing specializations of both the high and low reputation countries although differing in motivation this result accords well with more traditional models of vertical mne 3 however this impetus for mne as well as its more traditional counterparts does not explain why the mne would choose foreign direct investment fdi over a less costly licensing arrangement 4 the quality uncertainty in this model along with the difference in equilibrium reputations allows us to address this question in particular appropriable reputational rents are generated by fdi when the high reputation parent firm procures and internalizes production with a low reputation host firm this fdi breaks the low reputation equilibrium of the host firm and generates reputational rents

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

unipolarity a structural perspective to say that the world is now unipolar is neither to praise american power let alone its leadership nor to accuse the united states of having established a worldwide empire it is to state a fact but one whose meaning is far from clear as we have neither a powerful theory nor much evidence about how unipolar systems operate a central difficulty for sorting this out entails determining the extent to which behavior and outcomes we have seen stem from structure rather than from other levels of analysis such as idiosyncratic aspects of the international environment the american domestic system and the role of individual leaders how might the system function if the unipole were nazi germany stalin s ussr or brezhnev s or a traditional autocracy or if it were the united states in a different era there would surely be major differences but we should still start our analysis with structure in fact this takes us quite far and as well to some unexpected places realism indicates that the unipole is likely to be difficult to restrain no matter how benign its intentions or domestic regime furthermore it is far from clear that it should seek to maintain existing arrangements both normal ambitions and in the current context american values and beliefs may lead the superpower to seek to change the system rather than preserve it world politics and the study of world politics academic analyses are influenced both by events in the world and by scholars political outlooks and preferences the growth of realism was obviously entangled with the cold war revisionism about the origins of this conflict was sparked by the war in vietnam although this approach in fact was unable to explain the self defeating american policy the subfield of international political economy ipe developed rapidly in the wake of the american abandonment of the gold standard the growth of opec and the oil boycott following the 1973 middle east war the other side of this coin is that things that are not happening lead to subjects being ignored the role of religion in international politics for example received little attention until the emergence of political islam similarly civil wars are important and interesting analytically but were intensively studied in the us only during the vietnam conflict when the subject was considered under the topics of counter insurgency or internal war falling back into quiescence until such types of conflict returned in the 1990s

the value allocation of an economy with differential information we analyze the shapley value allocation of an economy with differential information since the intent of the shapley value is to measure the sum of the expected marginal contributions made by an agent to any coalition that he she belongs to the value allocation of an economy with differential information provides an interesting way to measure the information advantage of an agent this feature of the shapley value allocation is not necessarily shared by the rational expectation equilibrium thus we analyze the informational structure of an economy with differential information from a different and new viewpoint

asymmetric information information externalities and efficiency the case of oil exploration in this article we examine the efect of private information and information externalities on the ex post eficiency of investment in oil exploration we show that too much drilling tends to occur ifjirms believe that the area is likely to contain a sizeable pool of oil and too little drilling occurs if the opposite is true bargaining with well defined property rights to the information externality can eliminate underinvestment but overinvestment remains a problem because firms have an incentive not to disclose their private information

stability with one sided incomplete information two notions of stability ex ante stability and bayesian stability are investigated in a matching model with non transferrable utility interdependent preferences and one sided incomplete information ex ante stable matching outcomes are unblocked for every belief on the blocking partner s type while bayesian stable matching outcomes are unblocked with respect to prior beliefs ex ante stability is a minimal requirement bayesian stability is a more selective desideratum with sound efficiency properties

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

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

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

decentralized trading with private information the paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values we consider an economy in which a large number of agents trade two assets in bilateral meetings a fraction of the agents has private information about the asset values we show that over time uninformed agents can elicit information from their trading partners by making small offers this form of experimentation allows the uninformed agents to acquire information as long as there are potential gains from trade in the economy as a consequence the economy converges to a pareto efficient allocation

auction design and favoritism abstract the theory of auctions has ignored the fact that often auction designers not the principal design auctions in a multi attribute auction the auction designer may bias his subjective evaluation of quality or distort the relative weights of the various attributes to favor a specific bidder an ancient concern in the procurement of weapons in the auctioning of government contracts and in the purchase of electricity by regulated power companies the paper analyzes the steps to be taken to reduce the possibility of favoritism it is first shown that in the absence of favoritism quality differentials among firms are more likely to be ignored if the auction designer has imperfect information about the firm s costs second if the auction designer may collude with only one bidder the other bidders should be chosen if they are at least as efficient as the former bidder and no hard information about quality differentials is released by the auction designer that would justify fair discrimination in favor of the former bidder last if the auction designer can collude with any bidder the optimal auction tends to a symmetric auction in which quality differentials are ignored the possibility of favoritism reduces the auction designer s discretion and makes the selection process focus on non manipulable monetary dimensions of bids

informational size and incentive compatibility we examine a general equilibrium model with asymmetrically informed agents the presence of asymmetric information generally presents a conflict between incentive com patibility and pareto efficiency we present a notion of informational size and show that the conflict between incentive compatibility and efficiency can be made arbitrarily small if agents are of sufficiently small informational size the incompatibility of pareto efficiency and incentive compatibility is a central theme in economics and game theory the issues associated with this incompatibility are particularly important in the design of resource allocation mechanisms in the presence of asymmetrically informed agents where the need to acquire information from agents in order to compute efficient outcomes and the incentives agents have to misrepresent that information for personal gain come into conflict despite a large literature that focuses on these issues there has been little work aimed at understanding those situations in which informational asymmetries are quantitatively important virtually every transaction is characterized by some asymmetry of information any investor who buys or sells a share of stock generally knows something rel evant to the value of the share that is not known to the person on the other side of the transaction in order to focus on more salient aspects of the problem many models rightly ignore the incentive problems associated with informa tional asymmetries in the belief that for the problem at hand agents are infor mationally small however few researchers have investigated the circumstances under which an analysis that ignores these incentive problems will yield results similar to those obtained when these problems are fully accounted for in this paper we study a class of mechanism design problems our goal is to formalize informational size in a way that when agents are informationally small 1 early versions of this paper circulated under the titles informational smallness and pareto effi ciency and informational smallness and incentive compatibility we thank jacques cremer dean foster andreu mas colell stephen morris david schmeidler and particularly faruk gul for help ful conversations and rajiv vohra for a very careful reading we also thank the numerous partici pants in seminars at which this paper was presented for helpful comments we also thank an editor and the referees for very helpful comments and thank ichiro obara for pointing out an error in an earlier version postlewaite gratefully acknowledges support from the national science foundation

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

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

virtual utility and the core for games with incomplete information abstract the core is extended to games with incomplete information the feasible set is characterized by incentive compatible mechanisms blocking is organized at the interim stage by an incentive compatible mediation plan membership of the blocking coalition itself may be determined randomly by the blocking mediator nonemptiness of an interim fine core is proven for games with a balanced structure independent types and sidepayments an offer of severance payments may be needed to inhibit blocking core allocations are characterized in terms of virtual utility scales that generalize the weighted utility scales of the inner core mechanisms that achieve core allocations are coalitionally durable

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

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

technology and public goods abstract this paper presents a theory of public goods based on production theory where public goods are viewed as inputs to the production process we examine the pure case of public inputs no private inputs as well as the mixed case private and public inputs we show how the case of public inputs is related to certain forms of nonjoint production and we characterize it in terms of variable profit and joint cost functions comparative statics results are derived graphically in the two by two case

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