A new approach to modeling decision-making under uncertainty

This paper presents two axiomatic models of decision making under uncertainty that avoid the use of a state space. The first is a subjective expected utility model with action-dependent subjective probabilities and effect-dependent preferences (the case of effect-independent preferences is obtained as a special instance). The second is a nonexpected utility model involving well-defined families of action-dependent subjective probabilities on effects and a utility representation that is not necessarily linear in these probabilities (a probabilistic sophistication version of this model, with action-dependent subjective probabilities is obtained as a special case). The hospitality of EUREQua, University of Paris 1, and financial support by the National Science Foundation grant SES-0314249 are gratefully acknowledged.     

Ricardian equivalence under imperfect information

In the US, aggregate private consumption changes are excessively sensitive not only to current and lagged changes in income, but also to current and lagged changes in government expenditures. I give a new theoretical interpretation to this observation. I show that this excess sensitivity arises when consumers take into account the link between taxes and government expenditures (i.e. when they are Ricardian), but lack exact information on the aggregate economy. While the model provides a simultaneous explanation for both types of excess sensitivity, the strong restrictions that it imposes on the data are not supported by the results of econometric estimation.     

Lobbying under political uncertainty

This paper considers a model of lobbying described as a common agency game; it departs from the current literature by assuming that the special interest groups are not a priori organized or unorganized and that the type of the politician is not common knowledge. We characterize equilibria when the choice set of the politician consists of two policies; we discuss the conditions leading to efficiency and the characteristics of the groups explaining their relative success in the process of influence. We also offer some results for the general case, including disjoint necessary and sufficient conditions for the equilibria to be efficient.     

Neutral taxation under uncertainty

The analogs under uncertainty of two well-known certainty results are derived: first, if there are timing differences between tax payments and accruals, neutrality is preserved if the resulting tax credits or liabilities are carried forward at the risk-free interest rate, provided that tax credits and liabilities are sure to be redeemed eventually. Second, the invariance of asset valuations with respect to the rate of income tax, at a given pre-tax interest rate, proved by Johansson and Samuelson under certainty, can be extended to cover the case of uncertainty, given analogous ceteris paribus conditions.     

Consumption loans under uncertainty

A stationary equilibrium for a sequence of markets under uncertainty is defined as a stationary stochastic process of temporary market equilibria. The purpose of this paper is to apply this equilibrium concept to a consumption-loans model with stochastic resources. Given that agents live for only two periods, that resources are allocated independently and identically, and that traders make “admissible” consumption decisions, it is shown that the sequence of equilibrium trades on forward markets is a Markov chain. When this chain is strictly stationary with a unique invariant distribution, the sequence of markets is in stationary equilibrium. Using Gale's classification scheme, a strictly stationary chain exists for each type of economy (classical, Samuelson, mixed). Questions concerning convergence to the invariant distribution for each type of economy are addressed by determining when the chain satisfies various recurrence conditions.     

Cobb-Douglas preferences under uncertainty

This paper axiomatizes Cobb-Douglas preferences under uncertainty. First, we extend the original Trockel (Econ Lett 30:7–10, 1989)’s axiomatic foundation to a general state space framework based on the Strong Homotheticity Axiom, obtaining also the incomplete case a la Bewley (Decis Econ Financ 25:79–110, 2002). We show that this key axiom for the Cobb-Douglas expected utility specification is refuted by Ellsberg’s uncertainty aversion behavioral pattern. Our main result provides a set of meaningful axioms characterizing Cobb-Douglas min-expected utility preferences, an important class of uncertainty averse preferences for studying the consequences of ambiguity in finance and other fields. Finally, we present briefly how to obtain more general representations like the variational case.     

Macroprudential policy under uncertainty

Portuguese Economic Journal - In this paper, an index of domestic macroprudential policy tools is constructed and the effectiveness of these tools in controlling credit growth, managing GDP growth...     

Commodity taxes under uncertainty

This paper considers the relative distorting effect on output of commodity taxes, specific and ad valorem, in a situation where a firm faces revenue uncertainty. It is shown generally that this effect depends both on the precise nature of the firm's revenue uncertainty and on the degree of its risk aversion. More specifically, the distorting effect of each tax is characterised for a selection of objective functions and uncertain environments. These characterisations are compared in order to show the influence of alternative specifications on the relative distorting effect.     

Soviet enterprise behavior under uncertainty

Input-supply uncertainty is a well-documented characteristic of Soviet economic planning. The formal literature on Soviet enterprise behavior is found to be asymmetric in its development. A more general model of the enterprise's behavior under uncertainty is developed. Among other results, it is demonstrated that all agents, regardless of attitude toward risk, will overorder an input subject to supply uncertainty.     

Optimal policy choice under uncertainty

Neutrality is shown to be the appropriate goal of policy in the class of realistic policy situation in which allocative decisions are taken with virtually no knowledge of the direction or magnitude of pre-existing resource misallocation. This follows as the principal corollary of the central theorem of the paper which states that with linear demand and constant marginal cost schedules, the appropriate excise tax under uncertainty is equal to the expected value of the market distortion. This theorem is proved and its major implications for corrective fiscal policy are discussed.     

Interim efficient allocations under uncertainty

This paper considers an exchange economy under uncertainty with asymmetric information. Uncertainty is represented by multiple priors and posteriors of agents who have either Bewley's incomplete preferences or Gilboa-Schmeidler's maximin expected utility preferences. The main results characterize interim efficient allocations under uncertainty; that is, they provide conditions on the sets of posteriors, thus implicitly on the way how agents update the sets of priors, for non-existence of a trade which makes all agents better off at any realization of private information. For agents with the incomplete preferences, the condition is necessary and sufficient, but for agents with the maximin expected utility preferences, the condition is sufficient only. A couple of necessary conditions for the latter case are provided.     

Markets and regulation under uncertainty

Unlike many comparisons of control strategies under uncertainty, this letter will report that, in some cases, optimality can be achieved ex ante if specific andad valorem taxes are imposed upon a functioning market with externalities.     

Optimal corporate strategy under uncertainty

Within a dynamic setting, optimal corporate strategy management for a multi-division corporation involves restructuring a portfolio of Strategic Business Units (SBUs) periodically so as to maximize the firm's market value. Real option theory has been applied to model and explain managerial flexibility for both project selection and operational decisions. In general, optimal corporate strategy has focused on strategic environments and characteristics of business units rather than on managerial flexibility. In this article, we develop a feasible discrete-time model for optimal corporate strategy that incorporates both endogenous and exogenous factors and is consistent with the value-based criterion for maximizing shareholders’ wealth.     

Production and savings under uncertainty

This paper studies an integrated model of production and savings under uncertainty in which production inputs and the amount of savings are jointly chosen. The analysis shows that if the agent's risk preferences exhibit constant absolute risk aversion, then all results from nonintegrated or separate models of savings and production extend to the integrated framework. Under decreasing absolute risk aversion, the comparative static properties of optimal production decisions with respect to mean preserving spread and spread preserving mean parameters extend from the non-integrated to the integrated framework. However, extension of the savings model results for the same parameters requires a restriction on production technology.