We show how optimal saving in a two-period model is affected when prudence and risk aversion of the underlying utility function change. Increasing prudence alone will induce higher savings only if, for certain combinations of the interest rate and the pure time discount rate, there is distributional neutrality between the two periods. Otherwise, changes of risk aversion that affect the distribu...

THIS SUPPLEMENT CONTAINS results identifying the relevant measures and implications of comparative ambiguity aversion for Continuous Symmetric versions of several additional models from the ambiguity literature: the extended MEU with contraction model (see, e.g., Gajdos, Hayashi, Tallon, and Vergnaud (2008), Gajdos, Tallon, and Vergnaud (2004), Kopylov (2008), Tapking (2004)), the vector expect...

This work addresses a tactical planning problem faced by a forestry firm, deciding which timber units to harvest and what roads to build to obtain the greatest possible benefits. We include uncertainty in prices by means of utility theory. This enables solutions to be found that the firm finds preferable to those obtained when risk aversion is ignored and makes it possible to design insurance c...

where u1 is the proportion of the portfolio held in stocks, and u2 is the consumption rate. Evidently it is natural to take 0 ≤ u1 ≤ 1 and u2 ≥ 0, but in fact we shall allow −∞ < u1 <∞. If u1 > 1 then the cash part of the portfolio is negative, so we are borrowing money to buy stocks. If u1 < 0 then the stock part of the portfolio is negative, so we are so called shorting the stock. The goal is...

We analyze a market populated by expected utility maximizers and smooth ambiguity-averse consumers. We study conditions under which ambiguity-averse consumers survive and affect prices in the limit. If ambiguity vanishes with time or if the economy exhibits no aggregate risk, ambiguity-averse consumers survive, but have no long-run impact on prices. In both scenarios, ambiguity-averse consumers...

This paper proves the existence of fully-revealing rational expectations equilibria for almost all sets of beliefs when investors are ambiguity averse and have preferences that are characterized by Choquet expected utility. The result implies that strong-form efficient equilibrium prices exist even when many investors in the market make use of information in a way that is substantially differen...

We present a random variable characterization of the necessary and sufficient conditions for a shift of the distribution of rate of return on the risky asset in the two asset portfolio problem to reduce demand for all risk–averse expected utility maximizing investors. We also present a random variable characterization of the shifts that lead to both a reduction in demand and a non–increase in e...

The British Premium Bond, which offers a monthly uncertain return solely based on a lottery, is an immense success. Why? We find that the bond bears relatively low risk in terms of CARA and CRRA utility. Since prizes are tax-free, the higher an individual’s tax bracket, the more it pays to invest in the lottery bond. However, we demonstrate that the CARA and CRRA coefficients (before and after ...

We expand upon the previous models of inequity aversion of Fehr and Schmidt (1999) and Frohlich, Oppenheimer and Kurki (2004), which assume that dictators get disutility if the final allocation of the surplus deviates from the equal split (egalitarian principle) or from the subjects’ production (libertarian principle). In our model, dictators may also account for the way in which the surplus wa...