Efficient Allocations under Ambiguity. Tomasz Strzalecki (Harvard University) Jan Werner (University of Minnesota)

Transcription

1 Efficient Allocations under Ambiguity Tomasz Strzalecki (Harvard University) Jan Werner (University of Minnesota)

2 Goal Understand risk sharing among agents with ambiguity averse preferences

3 Ambiguity 30 balls Red 60 balls Green or Blue

4 Ambiguity R G B r

5 Ambiguity R G B r g

6 Ambiguity R G B r g r 0 1 1

7 Ambiguity R G B r g r g 1 0 1

8 Goal Understand risk sharing among agents with ambiguity averse preferences

9 Setup and notation S states of the world (finite) (S) all probabilities on S two agents exchange economy, one shot ex ante trade f : S R + allocation of agent 1 g : S R + allocation of agent 2

10 Question 1: Full Insurance

11 Full Insurance Theorem agents have strictly risk averse EU the aggregate endowment is risk-free common beliefs = all PO allocations are risk-free

12

13

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15 Question 2: Conditional Full Insurance

16 Conditional Full Insurance Theorem agents have strictly risk averse EU the aggregate endowment is G-measurable G-concordant beliefs = all PO allocations are G-measurable

17 Conditional Full Insurance Theorem agents have strictly risk averse EU the aggregate endowment is G-measurable G-concordant beliefs = all PO allocations are G-measurable p( G) = q( G) for all G G

18 Conditional Full Insurance Theorem agents have strictly risk averse EU the aggregate endowment is G-measurable G-concordant beliefs = all PO allocations are G-measurable p( G) = q( G) for all G G E p [f G] = E q [f G] for all f

19 Proof u (f (s 1 )) p(s 1 ) u (f (s 2 )) p(s 2 ) = v (g(s 1 )) q(s 1 ) v (g(s 2 )) q(s 2 )

20 Proof u (f (s 1 )) u (f (s 2 )) = v (g(s 1 )) v (g(s 2 ))

21 Proof u (f (s 1 )) u (f (s 2 )) = v (g(s 1 )) v (g(s 2 )) If f (s 1 ) > f (s 2 ) then g(s 1 ) > g(s 2 ), but that can t be since f (s 1 ) + g(s 1 ) = f (s 2 ) + g(s 2 )

22 Question 3: Comonotonicity

23 Question 3: Comonotonicity [f (s 1 ) f (s 2 )][g(s 1 ) g(s 2 )] 0

24 Comonotonicity Theorem agents have strictly risk averse EU common probability beliefs = all PO allocations are comonotone

25 Proof u (f (s 1 )) p(s 1 ) u (f (s 2 )) p(s 2 ) = v (g(s 1 )) p(s 1 ) v (g(s 2 )) p(s 2 )

26 Proof u (f (s 1 )) p(s 1 ) u (f (s 2 )) p(s 2 ) = v (g(s 1 )) p(s 1 ) v (g(s 2 )) p(s 2 ) Concordant not enough, because I need this to hold for any two states, so boils down to p = q

27 Proof u (f (s 1 )) u (f (s 2 )) = v (g(s 1 )) v (g(s 2 ))

28 Proof u (f (s 1 )) u (f (s 2 )) = v (g(s 1 )) v (g(s 2 )) If f (s 1 ) > f (s 2 ) then g(s 1 ) > g(s 2 )

29 Question: What is the analogue of these results for ambiguity averse?

30 Main Characters 1. Expected utility (EU) : U(f ) = E p u(f )

31 Main Characters 1. Expected utility (EU) : U(f ) = E p u(f ) 2. Maxmin expected utility (MEU): U(f ) = min p C E p u(f )

32 Main Characters 1. Expected utility (EU) : U(f ) = E p u(f ) 2. Maxmin expected utility (MEU): U(f ) = min p C E p u(f ) Constraint preferences: C q,ɛ = {p (S) R(p q) ɛ}

33 Main Characters 1. Expected utility (EU) : U(f ) = E p u(f ) 2. Maxmin expected utility (MEU): U(f ) = min p C E p u(f ) Constraint preferences: C q,ɛ = {p (S) R(p q) ɛ} Rank dependent EU: C q,γ = {p (S) p(a) γ(q(a))}

34 Main Characters 1. Expected utility (EU) : U(f ) = E p u(f ) 2. Maxmin expected utility (MEU): U(f ) = min p C E p u(f ) Constraint preferences: C q,ɛ = {p (S) R(p q) ɛ} Rank dependent EU: C q,γ = {p (S) p(a) γ(q(a))} 3. General : strictly convex, monotone, continuous

35 This gives us freedom to play with the risk-neutral probabilities without bending the utility too much

36 EU

37 MEU

38 MEU dual space

39 Variational

40 Full Insurance for Ambiguity averse What is the analogue of the common beliefs condition?

41 Full Insurance for Ambiguity averse Billot, Chateauneuf, Gilboa, and Tallon (2000) Rigotti, Shannon, and Strzalecki (2008)

42 Beliefs

43 Beliefs p (S) is a subjective belief at f if E p (h) E p (f ) for all h f

44 Full Insurance agents have strictly convex preferences the aggregate endowment is risk-free shared beliefs = all PO allocations are risk-free

45

46 C

47 Conditions on Beliefs EU Full Insurance same beliefs shared beliefs

48 Conditions on Beliefs EU Full Insurance same beliefs shared beliefs Conditional Full Insurance concordant beliefs?

49 Conditional Full Insurance

50 Conditional Full Insurance

51 Conditional Full Insurance

52 Conditional Full Insurance

53 Conditional Full Insurance

54 Conditional Full Insurance

55 Conditional Full Insurance The problem is that MRS 12 depends on what is going on in state 3 (Sure thing principle violated)

56 Conditional Full Insurance p is a subjective belief at f if E p (h) E p (f ) for all h f

57 Conditional Full Insurance p is a subjective belief at f if E p (h) E p (f ) for all h f p is a G-conditional belief at f if p is concordant with some subjective belief at f

58 Conditional Full Insurance p is a subjective belief at f if E p (h) E p (f ) for all h f p is a G-conditional belief at f if p is concordant with some subjective belief at f p is a consistent G-conditional belief if p is a G-conditional belief at any G-measurable f

59 Conditional Full Insurance p is a subjective belief at f if E p (h) E p (f ) for all h f p is a G-conditional belief at f if p is concordant with some subjective belief at f p is a consistent G-conditional belief if p is a G-conditional belief at any G-measurable f Can show: p is a consistent G-conditional belief iff E p [h G] h for all h Or: p is a consistent G-conditional belief iff f f + ɛ for every ɛ with E p [ɛ G] = 0

60 When does this happen? MEU with concave utility and set of priors C q is a consistent G-conditional belief iff p q G C for every p C

61 When does this happen? MEU with concave utility and set of priors C q is a consistent G-conditional belief iff p q G C for every p C p q G = conditionals from q, marginals from p

62 When does this happen?

63 Examples Constraint preferences: C q,ɛ = {p (S) R(p q) ɛ}

64 Examples Constraint preferences: C q,ɛ = {p (S) R(p q) ɛ} Divergence preferences: C q,ɛ = {p (S) D(p q) ɛ}

65 Examples Constraint preferences: C q,ɛ = {p (S) R(p q) ɛ} Divergence preferences: C q,ɛ = {p (S) D(p q) ɛ} Rank dependent EU: C q,γ = {p (S) p(a) γ(q(a))}

66 Conditional Full Insurance Theorem agents have strictly convex preferences the aggregate endowment is G-measurable shared consistent G-conditional beliefs = all PO allocations are G-measurable

67 Conditional Full Insurance

68 Comonotonicity Theorem agents have strictly convex preferences the aggregate endowment is G-measurable shared consistent H-conditional beliefs for any H coarser than G = all PO allocations are comonotone

69 Other papers Chateauneuf, Dana, and Tallon (2000)

70 Other papers Chateauneuf, Dana, and Tallon (2000) de Castro and Chateauneuf (2009)

71 Other papers Chateauneuf, Dana, and Tallon (2000) de Castro and Chateauneuf (2009) Kajii and Ui (2009); Martins da Rocha (forthcoming)

72 Billot, A., A. Chateauneuf, I. Gilboa, and J.-M. Tallon (2000): Sharing Beliefs: Between Agreeing and Disagreeing, Econometrica, 68, Chateauneuf, A., R. Dana, and J. Tallon (2000): Risk sharing rules and Equilibria with non-additive expected utilities, Journal of Mathematical Economics, 34, de Castro, L. and A. Chateauneuf (2009): Ambiguity Aversion and Trade, mimeo. Kajii, A. and T. Ui (2009): Interim efficient allocations under uncertainty, Journal of Economic Theory, 144, Martins da Rocha, V. F. (forthcoming): Interim efficiency with MEU-preferences, JET. Rigotti, L., C. Shannon, and T. Strzalecki (2008): Subjective Beliefs and Ex Ante Trade, Econometrica, 76,