We study the implications of credit market frictions for the dynamics of corporate capital structure and the risk of default of corporations. To do so, we develop a dynamic capital structure model in which firms face uncertainty regarding their ability to raise funds in credit markets and have...

An exchange economy in which agents have convex incomplete preferences defined by families of concave utility functions is considered. Sufficient conditions for the set of efficient allocations and equilibria to coincide with the set of efficient allocations and equilibria that result when each...

This paper presents a strategic model of risk-taking behavior in contests. Formally, we analyze an n-player winner-take-all contest in which each player decides when to stop a privately observed Brownian motion with drift. A player whose process reaches zero has to stop. The player with the...

We study the behavior of an agent who dislikes large choice sets because of the ‘cost of thinking’ involved in choosing from them. Focusing on preferences over lotteries of menus, we introduce the notion of Thinking Aversion. We characterize preferences as the difference between an affine...

Starting with the seminal paper of Gilboa and Schmeidler (1989) [32] an analogy between the maxmin approach of decision theory under ambiguity and the minimax approach of robust statistics – e.g., Blum and Rosenblatt (1967) [10] – has been hinted at. The present paper formally clarifies this...

In this note we extend the theory of precautionary saving to the case of multivariate risk. We introduce a notion of multivariate prudence, related to a precautionary premium, and we propose a matrix-measure to capture the strength of the precautionary saving motive. We discuss the usefulness of...

We study decision makers who willingly forgo decision rules that vary finely with available information, even though these decision rules are technologically feasible. We model this behavior as a consequence of using classical, frequentist methods to draw robust inferences from data. Coarse...

The idea of representing choice under uncertainty as a trade-off between mean returns and some measure of risk or uncertainty is fundamental to the analysis of investment decisions. In this paper, we show that preferences can be characterized in this way, even in the absence of objective...

Dekel, Lipman, and Rustichini [3] characterize preferences over menus of lotteries that can be represented by the use of a unique subjective state space and a prior. We investigate what would be the appropriate version of Dynamic Consistency in such a setup. The condition we find, which we call...

We axiomatize, in an Anscombe–Aumann framework, the class of preferences that admit a representation of the form V(f)=μ−ρ(d), where μ is the mean utility of the act f with respect to a given probability, d is the vector of state-by-state utility deviations from the mean, and ρ(d) is a...