Equilibria under Knightian Price Uncertainty

Patrick Beißner and Frank Riedel
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Patrick Beißner: Center for Mathematical Economics, Bielefeld University
Authors registered in the RePEc Author Service: Patrick Beißner

No 597, Center for Mathematical Economics Working Papers from Center for Mathematical Economics, Bielefeld University

Abstract: We study economies in which agents face Knightian uncertainty about state prices. Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to Pareto inefficient allocations; the equilibria coincide with Arrow-Debreu equilibria only if the values of net trades are ambiguity-free in the mean. In economies without aggregate uncertainty, inefficiencies are generic. We introduce a constrained efficiency concept, uncertainty-neutral efficiency; equilibrium allocations under price uncertainty are efficient in this constrained sense. Arrow-Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty.

Pages: 28
Date: 2018-08-16
New Economics Papers: this item is included in nep-mic
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https://pub.uni-bielefeld.de/download/2930443/2930444 First Version, 2018 (application/pdf)

Related works:
Journal Article: Equilibria Under Knightian Price Uncertainty (2019)
Working Paper: Equilibria Under Knightian Price Uncertainty (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bie:wpaper:597

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