Ambiguity, uncertainty aversion and equilibrium welfare

Rose-Anne Dana

Economic Theory, 2004, vol. 23, issue 3, 569-587

Abstract: In order to analyse the effect of ambiguity and uncertainty aversion on equilibrium welfare, a two period, pure exchange one good economy is considered. Agents are Choquet-expected-utility maximizers with same convex capacity and strictly concave utility index. It is proven that equilibrium is indeterminate whenever several probabilities in the core of the capacity minimize the expected value of aggregate endowment and not all agents have same expected endowments under those probabilities. It is further shown that small changes in aggregate endowment may have drastic welfare implications. A more general model is considered in the case of no aggregate uncertainty: agents have a set of priors and are uncertainty averse as modelled by Gilboa-Schmeidler [1989]. In the case of complete markets, it is shown that assets have a spread of equilibrium prices similar to the spread of no-arbitrage prices compatible with absence of arbitrage in markets with imperfections. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Ambiguity; Uncertainty aversion; Equilibrium welfare; Equilibrium pricing. (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1007/s00199-003-0383-2

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