Subjective Beliefs and ex ante Trade

Luca Rigotti, Chris Shannon and Tomasz Strzalecki

Econometrica, 2008, vol. 76, issue 5, 1167-1190

Abstract: We study a definition of subjective beliefs applicable to preferences that allow for the perception of ambiguity, and provide a characterization of such beliefs in terms of market behavior. Using this definition, we derive necessary and sufficient conditions for the efficiency of ex ante trade and show that these conditions follow from the fundamental welfare theorems. When aggregate uncertainty is absent, our results show that full insurance is efficient if and only if agents share some common subjective beliefs. Our results hold for a general class of convex preferences, which contains many functional forms used in applications involving ambiguity and ambiguity aversion. We show how our results can be articulated in the language of these functional forms, confirming results existing in the literature, generating new results, and providing a useful tool for applications. Copyright 2008 The Econometric Society.

Date: 2008
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