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Choice under aggregate uncertainty

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Abstract

We provide a simple model to measure the impact of aggregate risks. We consider agents whose rankings of lotteries over vectors of outcomes satisfy expected utility and separability. Such rankings are characterized in terms of aggregative utilities that measure sensitivity to aggregate uncertainty in a straightforward way. We consider applications to models of product variety, portfolio choice, and public attitudes towards catastrophic risks. The framework lends support to precautionary measures that penalize policies for exposure to correlation. The model rationalizes a number of behavioral and policy patterns as attempts to hedge against aggregate uncertainty. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Nabil Al-Najjar & Luciano Pomatto, 2016. "Choice under aggregate uncertainty," Theory and Decision, Springer, vol. 80(2), pages 187-209, February.
    • Handle: RePEc:kap:theord:v:80:y:2016:i:2:p:187-209
    DOI: 10.1007/s11238-015-9504-1
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    Cited by:

    1. Long, Yan & Sethuraman, Jay & Xue, Jingyi, 2021. "Equal-quantile rules in resource allocation with uncertain needs," Journal of Economic Theory, Elsevier, vol. 197(C).
    2. Al-Najjar, Nabil I. & Pomatto, Luciano, 2020. "Aggregate risk and the Pareto principle," Journal of Economic Theory, Elsevier, vol. 189(C).
    3. Ummad Mazhar, 2021. "Women empowerment and insecurity: firm-level evidence," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 56(1), pages 43-53, January.
    4. Nabil I. Al-Najjar, 2015. "A Bayesian Framework for the Precautionary Principle," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 337-365.

    More about this item

    Keywords

    Aggregate risks; Risk and uncertainty;

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