Knight--Walras Equilibria

Patrick Beissner and Frank Riedel

Papers from arXiv.org

Abstract: Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and establish their existence. In general, such equilibria lead to Pareto inefficiency and coincide with Arrow--Debreu equilibria only if the values of net trades are ambiguity--free in the mean. Without aggregate uncertainty, inefficiencies arise generically. We introduce a constrained efficiency concept, uncertainty--neutral efficiency and show that Knight--Walras equilibrium allocations are efficient in this constrained sense. Arrow--Debreu equilibria turn out to be non--robust with respect to the introduction of Knightian uncertainty.

Date: 2016-05
New Economics Papers: this item is included in nep-mic
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Working Paper: Knight-Walras equilibria (2016)
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