The conflict between Pareto optimality and incentive compatibility, that is, the fact that some Pareto optimal (efficient) allocations are not incentive compatible is a fundamental fact in information economics, mechanism design and general equilibrium with asymmetric information. This important...

Ellsberg's experiment involved a gamble with no ambiguity (N) and a gamble where the prize that could be won is objectively known, but the winning probability depends on the (ambiguous) urn's composition (P). We extend this by including a gamble where the winning probability is objectively...

We study the relation between ambiguity aversion and the Allais paradox. To this end, we introduce a novel definition of hedging which applies to objective lotteries as well as to uncertain acts, and we use it to define a novel axiom that captures a preference for hedging which generalizes the...

There is a large literature showing that willingness-to-accept (WTA) is usually much higher than willingness-to-pay (WTP) in empirical studies although they should be roughly equal according to traditional economic theory. A second stream of literature shows that people are typically ambiguity...

We present a model of incomplete information games with sets of priors. Upon arrival of private information, each player "updates" by the Bayes rule each of priors in this set to construct the set of posteriors consistent with the arrived piece of information. Then the player uses a possibly...

The Ellsberg Paradox demonstrates that people's belief over uncertain events might not be representable by subjective probability. We show that if a risk averse decision maker, who has a well defined Bayesian prior, perceives an Ellsberg type decision problem as possibly composed of a bundle of...

Decisions of investing in sovereign assets involve both risk and ambiguity. Ambiguity arises from unknown elements characterizing the value of a generic sovereign. In presence of ambiguity, ambiguity-averse investors are prone to pay for obtaining summary information such as ratings which...

Model builders face ambiguity about the true data generating process. Consequently, they need to deal with ambiguity attitudes (inside uncertainty) and ambiguous financial reality (outside uncertainty) when developing and estimating financial models. We introduce a novel approach for...

This paper assesses the quantitative impact of ambiguity on the historically observed financial asset returns and prices. The single agent, in a dynamic exchange economy, treats the conditional uncertainty about the consumption and dividends next period as ambiguous. We calibrate the agent's...