A behavioral competitive equilibrium restricts households ability to tailor their consumption to the state of the economy. Compared to standard competitive equilibrium, a behavioral competitive equilibrium yields more consumption risk and extreme price volatility when the realized output is near its maximum or minimum.
As demonstrated by the email game of Rubinstein (1989), the predictions of the standard equilibrium models of game theory are sensitive to assumptions about the fine details of the higher order beliefs. This paper shows that models of bounded depth of reasoning based on level-k thinking or cognitive hierarchy make predictions that are independent of the tail assumptions on the higher order beliefs. In addition to this finding, the tools developed in this paper oer a new direction for the analysis of models of bounded depth of reasoning and their applications to various economic settings. (JEL C72, D03)
Models of ambiguity aversion have recently found many applications in dynamic settings. This paper shows that there is a strong interdependence between ambiguity aversion and the preferences for the timing of the resolution of uncertainty, as dened by the classic work of Kreps and Porteus (1978): the modeling choices that are being made in the domain of ambiguity aversion influence the set of modeling choices available in the domain of timing attitudes. The main result of the paper is that the only model of ambiguity aversion that exhibits indierence to timing is the maxmin expected utility of Gilboa and Schmeidler (1989). This paper also examines the structure of the timing nonindierence implied by the other commonly used models of ambiguity aversion. The interdependence of ambiguity and timing that this paper identies is of interest both conceptually and practically–especially for economists using these models in applications.
This paper axiomatizes the robust control criterion of multiplier preferences introduced by Hansen and Sargent (2001). The axiomatization relates multiplier preferences to other classes of preferences studied in decision theory, in particular, the variational preferences recently introduced by Maccheroni, Marinacci, and Rustichini (2006a). This paper also establishes a link between the parameters of the multiplier criterion and the observable behavior of the agent. This link enables measurement of the parameters on the basis of observable choice data and provides a useful tool for applications.
An important implication of the expected utility model under risk aversion is that if agents have the same probability belief, then the efficient allocations under uncertainty are comonotone with the aggregate endowment, and if their beliefs are concordant, then the efficient allocations are measurable with respect to the aggregate endowment. We study these two properties of efficient allocations for models of preferences that exhibit ambiguity aversion using the concept of conditional belief, which we introduce in this paper. We provide characterizations of such conditional beliefs for the standard models of preferences used in applications. ∗
This paper shows that in the class of variational preferences the notion of probabilistic sophistication is equivalent to expected utility as long as there exists at least one event such that the independence axiom holds for bets on that event. This extends a result of Marinacci (2002) and provides a novel interpretation of his result.
We study a deﬁnition of subjective beliefs applicable to preferences that allow for the perception of ambiguity, and provide a characterization of such beliefs in terms of market behavior. Using this deﬁnition, we derive necessary and sufﬁcient conditions for the efﬁciency of ex ante trade and show that these conditions follow from the fundamental welfare theorems. When aggregate uncertainty is absent, our results show that full insurance is efﬁcient if and only if agents share some common subjective beliefs. Our results hold for a general class of convex preferences, which contains many functional forms used in applications involving ambiguity and ambiguity aversion. We show how our results can be articulated in the language of these functional forms, conﬁrming results existing in the literature, generating new results, and providing a useful tool for applications.
In Senegal we encountered a situation in which a minority group of migrant fishermen had completely different sets of expectations regarding a collective action depending on the location where they operated. In one village expectations were pessimistic, while in the other village they were optimistic. Understanding this contrast and its implications provides the main justification for the paper. To be able to account for the contrast between the two areas, pessimistic expectations in the first area have to be traced back to a preceding conflict that could never be settled satisfactorily. A perverse path -dependent process had thus been set in motion that could not be changed by a simple act of will of a determined leadership. To demonstrate the links between expectations and actions that fit with the story told, we propose a simple model of collective action with asymmetric information.