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Ambiguity Aversion and the Absence of Indexed Debt

Sujoy Mukerji, Jean-Marc Tallon, CNRS-EUREQua and Université Paris I

No 28, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: If agent`s (subjective) beliefs are ambiguous then the beliefs may not be represented by a unique probability distribution in the standard Bayesian fashion but instead by a set of probabilities. Roughly put, an ambiguity averse decision maker evaluates an act by the minimum expected value that may be associated with it. Inspite of wide and long-standing support among economists for indexation of loan contracts there has been relatively little use of indexation, except in situations of extremely high inflation. The object of this paper is to provide a (theoretical) explanation for this puzzling phenomenon based on the hypothesis that economic agents are ambiguity averse. The present paper considers a competitive general equilibrium model of goods, money and bond markets populated by agents with Choquet expected utility preferences, where both nominal and indexed bonds are available for trade and prices of all goods and bonds are determined endogenously. We obtain conditions which promote an endogenous cessation of trade in indexed bonds: i.e., conditions under which there is no trade in indexed bonds in any equilibrium; only nominal bonds are traded.

Keywords: Choquet expected utility; ambiguity aversion; Knightian uncertainty; contracts; indexed bonds; indexation (search for similar items in EconPapers)
JEL-codes: D23 D8 (search for similar items in EconPapers)
Date: 2000-10-01
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Related works:
Chapter: Ambiguity aversion and the absence of indexed debt (2005)
Journal Article: Ambiguity aversion and the absence of indexed debt (2004) Downloads
Working Paper: Ambiguity aversion and the absence of indexed debt (2004)
Working Paper: Ambiguity aversion and the absence of indexed debt (2004)
Working Paper: Ambiguity Aversion and the Absence of Indexed Debt (2000)
Working Paper: Ambiguity Aversion and the Absence of Indexed Debt (2000)
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