We analyze how the threat of a potential future regime shift affects optimal management. We use a simple general growth model to analyze four cases that involve combinations of stock collapse versus changes in system dynamics, and exogenous versus endogenous probabilities of regime shift. Prior work has focused on stock collapse with endogenous probabilities and reaches ambiguous conclusions ab...

Yes, size actually matters. This paper models the strategic interaction between banks and the government when bailouts are possible. I analyze how imperfect common knowledge about the government’s bailout policy affects the ex-ante leverage choice for each bank. Large banks, by internalizing the effect of their size on the likelihood of being bailed out, are willing to take more leverage. In eq...

We study the problem of uncertainty sharing within a household: “risk sharing,” in a context of Knightian uncertainty. A household shares uncertain prospects using a social welfare function. We characterize the social welfare functions such that the household is collectively less averse to uncertainty than each member, and satisfies the Pareto principle and an independence axiom. We single out ...

We study uncertainty averse preferences, that is, complete and transitive preferences that are convex and monotone. We establish a representation result, which is at same time general and rich in structure. Many objective functions commonly used in applications are special cases of this representation. JEL classification: D81

We study feasible sets of the bargaining problem under two different assumptions: the players are subjective expected utility maximizers or the players are Choquet expected utility maximizers. For the latter case, we consider the effects on bargaining solutions when players become more risk averse and when they become more uncertainty averse. JEL Classification: C78, D81

In this paper we examine how increases in intertemporal price uncertainty affect the welfare of a consumer. In the preference structure of the consumer the coefficient of relative risk aversion and the elasticity of intertemporal substitution (EIS) are parametrically independent. We find that under empirically plausible circumstances, for each given degree of risk aversion an increase in price ...

We consider a robust version of the classic problem of optimal monopoly pricing with incomplete information. In the robust version, the seller faces model uncertainty and only knows that the true demand distribution is in the neighborhood of a given model distribution. We characterize the pricing policies under two distinct decision criteria with multiple priors: (i) maximin utility and (ii) mi...

We find that hotel mergers increase occupancy. In some specifications, price also rises. These effects occur only in markets with high capacity utilization and high uncertainty. These findings lead us to reject simple models of price or quantity competition in favor of models of “revenue management,” where firms price to fill available capacity in the face of uncertain demand. JEL classificatio...

This paper contributes to the micro-foundation of money in centralized markets with idiosyncratic uncertainty. It shows existence of stationary monetary equilibria and ensures that there is an optimum quantity of money. The rational solution of our model is compared with actual behavior in a laboratory experiment. The experiment gives support to the theoretical approach. JEL classification: C73...

The subjective framework for reasoning is extended to incorporate the representation of unawareness in games. Both unawareness of actions and decision makers are modeled as well as reasoning about others’ unawareness. It is shown that a small grain of uncertainty about unawareness with rational decision makers can lead to cooperation in the finitely repeated prisoner’s dilemma. JEL Classificati...