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Sequential Trading With Coarse Contingencies

Author

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  • Sarah Auster
  • Jeremy Kettering
  • Asen Kochov

Abstract

We consider a dynamic economy in which agents are initially unaware of some risks. As awareness of these risks emerges, markets re-open so agents can re-optimize and purchase insurance. An inefficiency may nonetheless arise as the cost of insurance is not spread over time. This ``savings mistake" does not arise in two benchmark cases. In those, the ability to re-trade fully negates the initial misperception of risks. We also demonstrate the possibility of unexpected default. This arises when agents borrow "too much" and once perceptions change, there is no equilibrium price at which they can refinance their debt.

Suggested Citation

  • Sarah Auster & Jeremy Kettering & Asen Kochov, 2021. "Sequential Trading With Coarse Contingencies," CRC TR 224 Discussion Paper Series crctr224_2021_254, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2021_254
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp254
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    References listed on IDEAS

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    1. Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 259-292.
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    6. Guerdjikova, A. & Quiggin, J., 2020. "Financial market equilibrium with bounded awareness," Working Papers 2020-10, Grenoble Applied Economics Laboratory (GAEL).
    7. Edi Karni & Marie-Louise Vier?, 2013. ""Reverse Bayesianism": A Choice-Based Theory of Growing Awareness," American Economic Review, American Economic Association, vol. 103(7), pages 2790-2810, December.
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    Cited by:

    1. Madotto, Matteo & Severino, Federico, 2023. "Heterogeneous awareness in financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 26-41.

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    More about this item

    Keywords

    coarse perceptions; unforeseen risks; sequential trading; default;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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