Sequential Trading with Coarse Contingencies

We consider a dynamic pure exchange economy in which agents have a coarse perception of the future and, in particular, may be unaware of some risks. As awareness of these risks emerges, markets have to re-open to allow the agents to re-optimize and purchase insurance. The paper provides an irrel-evance theorem, showing that if unforeseen shocks are purely idiosyncratic and agents become aware of them before they occur, then unawareness does not affect equilibrium consumption. Unawareness thus matters only if it concerns aggregate shocks. Building on this insight, we highlight several interesting im-plications for economies with unforeseen aggregate shocks: the agents’ failure to spread the cost of insurance efficiently across time, heterogeneous consump-tion growth rates, systematically biased price expectations and the possibility of unexpected default.