Ambiguity Aversion and Absence of Trade

Alain Chateauneuf and Luciano De Castro

No 1535, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: What is the effect of ambiguity aversion on trade? Although in a Bewley's model ambiguity aversion always lead to less trade, in other models this is not always true. However, we show that if the endowments are unambiguous then more ambiguity aversion implies less trade, for a very general class of preferences. The reduction in trade caused by ambiguity aversion can be as severe as to lead to no-trade. In an economy with MEU decision makers, we show that if the aggregate endowment is unanimously unambiguous then every Pareto optima allocation is also unambiguous. We also characterize the situation in which every unanimously unambiguous allocation is Pareto optimal. Finally, we show how our results can be used to explain the home-bias effect. As a useful result for our methods, we also obtain an additivity theorem for CEU and MEU decision makers that does not require comonotonicity JEL Code: D51, D6, D8

Keywords: no-trade results; ambiguity aversion; Pareto optimality. (search for similar items in EconPapers)
Date: 2011-04-01
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

Downloads: (external link)
http://kellogg.northwestern.edu/faculty/decastro/htm/personal/trade.pdf main text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://kellogg.northwestern.edu/faculty/decastro/htm/personal/trade.pdf [301 Moved Permanently]--> https://www.kellogg.northwestern.edu/faculty/decastro/htm/personal/trade.pdf)

Related works:
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:nwu:cmsems:1535

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014. Contact information at EDIRC.
Bibliographic data for series maintained by Fran Walker ( this e-mail address is bad, please contact ).