Essays on the economics of risk and uncertainty

In the first chapter of this thesis, I use the smooth ambiguity model developed by Klibanoff, Marinacci, and Mukerji (2005) to define the concepts of ambiguity and uncertainty premia in a way analogous to what Pratt (1964) did in the risk theory literature. I show that these concepts may be useful to quantify the effect ambiguity has on the welfare of economic agents. I also define several other concepts such as the unambiguous probability equivalent or the ambiguous utility premium, provide local approximations of these different premia and show the link that exists between them when comparing different degrees of ambiguity aversion not only in the small, but also in the large. In the second chapter, I analyze the effect of ambiguity on self-insurance and self-protection, that are tools used to deal with the uncertainty of facing a monetary loss when market insurance is not available (in the self-insurance model, the decision maker has the opportunity to furnish an effort to reduce the size of the loss occurring in the bad state of the world, while in the self-protection – or prevention – model, the effort reduces the probability of being in the bad state). In a short note, in the context of a two-period model I first examine the links between risk-aversion, prudence and self-insurance/self-protection activities under risk. Contrary to the results obtained in the static one-period model, I show that the impacts of prudence and of risk-aversion go in the same direction and generate a higher level of prevention in the more usual situations. I also show that the results concerning self-insurance in a single period framework may be easily extended to a two-period context. I then consider two-period self-insurance and self-protection models in the presence of ambiguity and analyze the effect of ambiguity aversion. I show that in most common situations, ambiguity prudence is a sufficient condition to observe an increase in the level of effort. I propose an interpretation of the model in the context of climate change, so that self-insurance and self-protection are respectively seen as adaptation and mitigation efforts a policy-maker should provide to deal with an uncertain catastrophic event, and interpret the results obtained as an expression of the Precautionary Principle. In the third chapter, I introduce the economic theory developed to deal with ambiguity in the context of medical decision-making. I show that, under diagnostic uncertainty, an increase in ambiguity aversion always leads a physician whose goal is to act in the best interest of his patient, to choose a higher level of treatment. In the context of a dichotomic choice (treatment versus no treatment), this result implies that taking into account the attitude agents generally manifest towards ambiguity may induce a physician to change his decision by opting for treatment more often. I further show that under therapeutic uncertainty, the opposite happens, i.e. an ambiguity averse physician may eventually choose not to treat a patient who would have been treated under ambiguity neutrality.