Alfonso Maselli

We study a decision maker who approaches an uncertain decision problem by formulating a set of plausible probabilistic models of the environment but is aware that these models are only stylized and incomplete approximations. The agent is effectively facing two layers of uncertainty. Not only is the decision maker uncertain regarding what model in this set has the best fit (model ambiguity), but she is also concerned that the best-fit model itself might be a poor description of the environment (model misspecification). We develop an axiomatic foundation for a general class of preferences that capture concern toward these two layers of uncertainty and allow us to compare individuals’ degrees of aversion to model misspecification and model ambiguity independently of each other.

This paper studies the welfare implications of accessing centralized versus decentralized over-the-counter (OTC) secondary markets. We develop a model of asymmetric information in the lending market in which borrowers have access to two costly signals. Creditworthy borrowers signal their type by liquidating non-pledgeable assets in a centralized market or exchanging them for collateralizable assets in an OTC market. Equilibrium prices and haircuts determine signaling costs endogenously. In the optimal separating contract, the cheapest market in terms of signaling costs is accessed. We establish conditions for existence of equilibria in which different markets are accessed - CM-only, OTC-only, and dual-market - and rank them by the welfare they provide to borrowers. We show that OTC-only equilibria offer the highest welfare, followed by dual-market and CM-only equilibria.