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Eliciting Second-Order Beliefs

Subir Bose and Arup Daripa
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Subir Bose: University of Leicester
Arup Daripa: Birkbeck, University of London

No 1710, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: We study elicitation of subjective beliefs of an agent facing ambiguity (model uncertainty): the agent has a non-singleton set of (first-order) priors on an event and a second-order prior on these first-order belief-states. Such a two-stage decomposition of uncertainty and non-reduction of compound lotteries resulting from nonneutrality to the second-order distribution plays an important role in resolving the Ellsberg Paradox. The problem of eliciting beliefs on unobservable belief-states with ambiguity-sensitive agents is novel, and we introduce new elicitation techniques using report-dependent prize variations. We construct a direct revelation mechanism that induces truthful reporting of the first-order belief states as well as the secondorder distribution on the belief-states as the unique best response. The technique requires knowledge of the sensitivity function to second-order distribution (capturing ambiguity attitude) and the vN-M utility function, which we also elicit.

Keywords: Ambiguity; second-order beliefs; elicitation of second-order beliefs (support and distribution); Klibanoff-Marinacci-Mukerji (2005) representation; elicitation of second-order-distribution-sensitivity function; elicitation of the vN-M utility function. (search for similar items in EconPapers)
JEL-codes: D81 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic and nep-upt
Date: 2017-12
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