Department of Economics and Economic History
Universitat Autònoma de Barcelona
This paper shows that payoff-irrelevant states may have real effects in ambiguity-averse economies. I consider complete and competitive markets with common priors. All traders observe a payoff-relevant state together with a payoff-irrelevant state. If the correlation between the two is subject to ambiguity, then the payoff-irrelevant state matters under maxmin, smooth, and variational preferences. Heterogeneous tastes or endowments result in a subjective ranking of priors by their utility cost in equilibrium. Bets mutually improve low-utility priors. I show that multiplier preferences do not generate such bets under common priors.
This paper studies the effect of limited commitment on sorting when two sides of a frictionless matching market form pairs to share risk. First, we provide analytical results when risk-sharing contracts condition on current shocks only. We show that (i) if the couple faces no aggregate risk, any stable matching is positive assortative in risk aversion, while (ii) if the correlation of income shocks is non-negative, matching is negative assortative. Second, we propose a numerical algorithm to detect assortativity when transfers are history dependent. Positive assortative matching can be stable both for positive and negative correlation of shocks.
This paper studies whether ambiguity about future wealth causes a delay in consumption. We find that maxmin (Gilboa and Schmeidler, 1989) and smooth preferences (Klibanoff, Marinacci and Mukerji, 2005) may both reinforce or discourage saving. First, the use of a worse belief need not increase saving. Second, smooth ambiguity preferences may favor present consumption unless absolute ambiguity aversion is decreasing. We provide sufficient conditions for smooth, maxmin, and multiplier preferences (Hansen and Sargent, 2001) to induce more saving than expected utility. These findings are applied to bond pricing and social discounting.This paper replaces our 2008 working paper Socially efficient discounting under ambiguity aversion
Older paper: Hedging Priors.