Guerdijkova, A. and Sciubba, Emanuela (2012) Survival with ambiguity. Working Paper. Birkbeck College, University of London, London, UK.
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Abstract
We analyze a market populated by expected utility maximizers and smooth ambiguity-averse consumers. We study conditions under which ambiguity-averse consumers survive and a¤ect prices in the limit. If ambiguity vanishes with time or if the economy exhibits no aggregate risk, ambiguity-averse consumers survive, but have no long-run impact on prices. In both scenarios, ambiguity-averse consumers are fully insured against ambiguity in equilibrium and, thus, behave as expected utility maximizers with correct beliefs. If ambiguity-averse consumers are not fully insured against ambiguity, they behave as expected utility maximiz- ers with e¤ectively wrong beliefs and an e¤ective discount factor which might be higher or lower than their actual discount factor. Using this in- sight, we demonstrate that consumers with constant absolute ambiguity aversion vanish in expectations, whenever the economy faces aggregate risk. In contrast, consumers with constant relative (and thus, decreas- ing absolute) ambiguity aversion survive in expectation and with positive probability and have a non-trivial impact on prices in the limit.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| Keyword(s) / Subject(s): | ambiguity, ambiguity-aversion, survival |
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Administrator |
| Date Deposited: | 11 Jan 2013 11:06 |
| Last Modified: | 02 Aug 2023 17:01 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/5943 |
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