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 ambiguous beliefs about consumption growth decrease interest rates. We show that this is not true in general for various ambiguity preference specifications. We identify two effects. The first acts like a pessimistic belief distortion that satisfies the monotone likelihood ratio property. It decreases rates for multiplier preference from robust control theory, but not necessarily for smooth or maxmin preferences. We build on classical expected utility theory to provide restrictions on beliefs and pref- erences such that interest rates decrease. Smooth preferences are shown to induce an additional ”ambiguity-prudence” effect which is negative if and only if absolute ambiguity aversion is decreasing. Finally, our analytical examples show that the term structure is qualitatively different from expected utility.This paper replaces our 2008 working paper Socially efficient discounting under ambiguity aversion
Older paper: Hedging Priors.