We test the implications of ambiguity aversion in a principal-agent problem with multiple agents. When output distributions are uncertain, models of ambiguity aversion suggest that tournaments may become more attractive than independent wage contracts, in contrast to the case where output...

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...

This paper examines the optimal production and export decisions of an international firm facing exchange rate uncertainty when the firm's preferences exhibit smooth ambiguity aversion. Ambiguity is modeled by a second-order probability distribution that captures the firm's uncertainty about...

We examine risk taking when the bank's preferences exhibit smooth ambiguity aversion. Ambiguity is modeled by a second-order probability distribution that captures the bank's uncertainty about which of the subjective beliefs govern the financial asset return risk. Ambiguity preferences are...

The standard Bayesian model implies that information can never have a negative value. We put this implication to the proof. Our paper provides the first test of the value (positive or negative) of information under uncertainty. We show that the "Bayesian implication" stands in conflict with the...

As illustrated by the famous Ellsberg paradox, many subjects prefer to bet on events with known rather than with unknown probabilities, i.e., they are ambiguity averse. In an experiment, we examine subjects’ choices when there is an additional source of ambiguity, namely, when they do not know...

We study in an experiment whether humans prefer to depend on decisions of other humans (social uncertainty) or states of nature (environmental uncertainty). In the social uncertainty treatments subjects depend only on past decisions of other humans. This is the first experiment that studies...