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Ambiguity aversion in the long run: “To disagree, we must also agree”

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  • Araujo, Aloisio
  • da Silva, Pietro
  • Faro, José Heleno

Abstract

We consider an economy populated by smooth ambiguity-averse agents with complete markets of securities contingent to economic scenarios, where bankruptcy is permitted but there is a penalty for it. We show that if agents' posterior belief reductions given by their “average probabilistic beliefs” do not become homogeneous then an equilibrium does not exist. It is worth noting that our main result does not imply any convergence of ambiguity perception or even the attitudes towards it. In this way, complete markets with default and punishment allow for ambiguity aversion in the long run, and the agents can disagree on their ambiguity perception but they must agree on their expected beliefs.

Suggested Citation

  • Araujo, Aloisio & da Silva, Pietro & Faro, José Heleno, 2016. "Ambiguity aversion in the long run: “To disagree, we must also agree”," Journal of Economic Theory, Elsevier, vol. 165(C), pages 242-256.
    • Handle: RePEc:eee:jetheo:v:165:y:2016:i:c:p:242-256
    DOI: 10.1016/j.jet.2016.04.008
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    More about this item

    Keywords

    Ambiguity aversion; Bankruptcy; Complete markets; Convergence of beliefs; Punishments; Smooth ambiguity model;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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