Ambiguity aversion in the long run: “To disagree, we must also agree”

Aloisio Araujo, Pietro da Silva and José Faro ()

Journal of Economic Theory, 2016, vol. 165, issue C, 242-256

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

Keywords: Ambiguity aversion; Bankruptcy; Complete markets; Convergence of beliefs; Punishments; Smooth ambiguity model (search for similar items in EconPapers)
JEL-codes: D53 D81 D84 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:165:y:2016:i:c:p:242-256

DOI: 10.1016/j.jet.2016.04.008

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