EconPapers    
Economics at your fingertips  
 

Fear of model misspecifcation and the robustness premium

Konstantinos Angelopoulos and Jim Malley ()

No 2010-79, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: Robust decision making implies welfare costs or robustness premia when the approximating model is the true data generating process. To examine the importance of these premia at the aggregate level we employ a simple two-sector dynamic general equilibrium model with human capital and introduce an additional form of precautionary behavior. The latter arises from the robust decision maker s ability to reduce the effects of model misspecification through allocating time and existing human capital to this end. We find that the extent of the robustness premia critically depends on the productivity of time relative to that of human capital. When the relative efficiency of time is low, despite transitory welfare costs, there are gains from following robust policies in the long-run. In contrast, high relative productivity of time implies misallocation costs that remain even in the long-run. Finally, depending on the technology used to reduce model uncertainty, we fi nd that while increasing the fear of model misspecfication leads to a net increase in precautionary behavior, investment and output can fall.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10943/208
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Fear of Model Misspecification and the Robustness Premium (2010) Downloads
Working Paper: Fear of model misspecification and the robustness premium (2010) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:edn:sirdps:208

Access Statistics for this paper

More papers in SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE) 31 Buccleuch Place, EH8 9JT, Edinburgh. Contact information at EDIRC.
Bibliographic data for series maintained by Research Office ().

 
Page updated 2021-02-26
Handle: RePEc:edn:sirdps:208