Equilibria Under Knightian Price Uncertainty

Patrick Beissner and Frank Riedel
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Patrick Beissner: ANU

No 142, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We study economies in which agents face Knightian uncertainty about state prices. Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to Pareto inefficient allocations; the equilibria coincide with Arrow-Debreu equilibria only if the values of net trades are ambiguity-free in the mean. In economies without aggregate uncertainty, inefficiencies are generic. We introduce a constrained efficiency concept, uncertainty-neutral efficiency, equilibrium allocations under price uncertainty are efficient in this constrained sense. Arrow-Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty.

Date: 2019-02-23
New Economics Papers: this item is included in nep-gth and nep-mic
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Related works:
Journal Article: Equilibria Under Knightian Price Uncertainty (2019)
Working Paper: Equilibria under Knightian Price Uncertainty (2018)
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