Ambiguity Aversion in the Long Run: "To Disagree, We Must Also Agree"

Aloisio Araújo, Pietro da Silva and José Heleno Faro

No 222, Business and Economics Working Papers from Unidade de Negocios e Economia, Insper

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 agentsí posterior belief reductions given by their ìaverage proba bilistic beliefs" do not become homogeneous then an equilibrium does not exist. It is worth noting that our main result does not imply any conver gence of ambiguity perception or even the attitudes towards it. In this way, complete markets with default and punishment allows for ambiguity aversion in the long run, and the agents can disagree on their ambiguity perception but they must agree on their expected beliefs.

Pages: 16 pages
Date: 2015
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