Smoothing preference kinks with information

Robert Chambers () and Tigran Melkonyan ()

Mathematical Social Sciences, 2009, vol. 58, issue 2, 173-189

Abstract: We identify conditions under which receipt of information in the form of a (potentially) ambiguous signal leads to a smoother maximin expected utility (MEU) preference structure which translates behaviorally into a smaller no-trade price zone. Narrowing of the no-trade price zone depends critically on the rectangularity of the belief structure, which, in the context of an MEU model, is a requirement of dynamic consistency in Machina's sense. Another important factor affecting the size of the no-trade price zone is the relative contribution of ambiguity in signals and ambiguity in posterior beliefs to the degree of prior ambiguity over market events.

Keywords: Maximin; expected; utility; Prior-by-prior; updating; WTP/WTA; gap; No-trade; price; zone (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:58:y:2009:i:2:p:173-189

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