Ambiguity aversion and the absence of wage indexation

This paper analyzes optimal wage contracting assuming agents are not subjective expected utility maximizers but are, instead, ambiguity (or uncertainty) averse decision makers who maximize Choquet expected utility. We show that such agents will choose not to include any indexation coverage in their wage contracts even when inflation is uncertain, unless the perceived inflation uncertainty is high enough. Significantly, the exercise does not presume any exogenous costs (e.g., transactions costs) of including indexation links.     

On multiple equilibria and the rational expectations hypothesis?

Summary. This paper analyzes through a simple two-period model the fact that, if some agents hold inside money intertemporally, the second-period “normalization” matters. Thus, there are several equilibria of the second-period economy, indexed by the level of inflation. A concept of equilibrium acknowledging this fact, and requiring that agents put some weight on any of the possible second-period equilibrium price vectors is developed. Such an equilibrium is shown to exist, and is illustrated by an example.     

Diversification, convex preferences and non-empty core in the Choquet expected utility model

Summary. We show, in the Choquet expected utility model, that preference for diversification, that is, convex preferences, is equivalent to a concave utility index and a convex capacity. We then introduce a weaker notion of diversification, namely “sure diversification.” We show that this implies that the core of the capacity is non-empty. The converse holds under concavity of the utility index, which is itself equivalent to the notion of comonotone diversification, that we introduce. In an Anscombe-Aumann setting, preference for diversification is equivalent to convexity of the capacity and preference for sure diversification is equivalent to non-empty core. In the expected utility model, all these notions of diversification are equivalent and are represented by the concavity of the utility index. Received: July 27, 1999; revised version: November 7, 2000     

On multiple equilibria and the rational expectations hypothesis

Summary This paper analyzes through a simple two-period model the fact that, if some agents hold inside money intertemporally, the second-period normalization matters. Thus, there are several equilibria of the second-period economy, indexed by the level of inflation. A concept of equilibrium acknowledging this fact, and requiring that agents put some weight on any of the possible second-period equilibrium price vectors is developed. Such an equilibrium is shown to exist, and is illustrated by an example.This a revised version of chapter three of my Ph.D. dissertation. I would like to thank David Cass, Atsushi Kajii, George Mailath and Shinichi Suda for helpful discussions and comments. Thanks are also due to Jean-Michel Grandmont who pointed out mistakes in a previous version. All remaining mistakes are of course my own. Financial support from a CARESS scholarship at the University of Pennsylvania is gratefully acknowledged.     

Attitudes Towards Foreign Products and Welfare with Capital Mobility

We develop a model of trade with imperfect competition to study the welfare implications in developing and developed countries of the asymmetry in attitudes towards foreign products. In the developed country, consumers benefit from a better perception of foreign products while the rental rate of capital declines as long as the location of capital remains unchanged. However, when capital is mobile, the developing country hosts more and more capital at the expense of the developed country as perception of varieties produced in the developed country improves and the surplus of consumers in the developed country can decrease.     

DECISION THEORY UNDER AMBIGUITY

Abstract We review recent advances in the field of decision making under uncertainty or ambiguity. We start with a presentation of the general approach to a decision problem under uncertainty, as well as the ‘standard’ Bayesian treatment and issues with this treatment. We present more general approaches (Choquet expected utility, maximin expected utility, smooth ambiguity and so forth) that have been developed in the literature under the name of models of ambiguity sensitive preferences. We draw a distinction between fully subjective models and models incorporating explicitly some information. We review definitions and characterizations of ambiguity aversion in these models. We mention the challenges posed by some of the models presented. We end with a review of part of the experimental literature and applications of these models to economic settings.     

Traders' Bidding Strategies on European Grain Export Refunds: An Analysis with Affiliated Signals

Using a multivariate distribution of traders' information with correlations, we specify the traders' bidding strategies on tenders of European soft wheat intervention stocks. We show that correlations may have opposing effects on the traders' bidding strategy, depending on their valuation of the grain. This structural approach allows us to estimate the traders' strategies using generalized method of moments procedures.     

Vertical differentiation with non-uniform consumers' distribution

This note explores a vertical differentiation model with a continuous non-uniform consumers' distribution. First, a result concerning the finiteness property obtained with uniform consumers' distribution is generalized. Second, we prove an existence result of price equilibrium when the distribution is concave. Finally, we exhibit a counter-example to the existence of price equilibrium to show that the concavity assumption is not superfluous.     

Optimal Area-Yield Crop Insurance Reconsidered

The implementability of area-yield insurance contracts in the presence of symmetric and asymmetric information about the farmer's "beta" linking his yield to the risk-pool's yield is examined. In the presence of fixed costs and symmetric information Mahul's result that optimality requires setting the slope of the indemnity schedule equal to each farmer's beta is confirmed. When there is asymmetric information between the insurer and the farmer, however, this full-insurance contract is vulnerable to adverse selection, and therefore may not be implementable for general cost structures. The optimal area-yield insurance contract under asymmetric information is characterized.     

Price Stability and the Case for Flexible Exchange Rates

We revisit Friedman’s case for flexible exchange rates in a small open economy with several distortions and rigidities and a variety of domestic and external shocks. We find that, for external shocks, the flexible exchange rate regime outperforms the fixed regime independent of the source of domestic nominal rigidities provided that the monetary authorities pursue a policy of strict inflation targeting. For domestic supply shocks, a joint policy of a flexible exchange rate and strict inflation targeting fares well when the main source of nominal rigidities is in the domestic goods markets, but not if rigidities arise in the labor markets.