Do Sunspots Matter under Complete Ignorance?
Cozzi, Guido and Giordani, Paolo E. (2006) Do Sunspots Matter under Complete Ignorance? [Working Paper]. p. 11.
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Official URL: http://docenti.luiss.it/giordani/files/2007/09/sun...
In a two-period, sunspot, pure-exchange economy we analyze the case in which agents do not assign subjective probabilistic beliefs to the "sunspot activity". Two generations, each of which is made up of identical agents, populate this economy. The participation in the Arrow securities market is restricted and the generation, which is allowed to trade in assets, can alternatively face uncertainty via two distribution-free decision rules under "complete ignorance"(axiomatized by Milnor (1954)): the "minimax regret criterion"(Savage (1954), ch.9) and the "maxmin return criterion"(Wald (1950)). When the former is used, then sunspots can matter. In particular we prove that, if the economy admits two Walrasian equilibria, then a unique sunspot equilibrium always exists. We pin down this equilibrium, determine the prices of the Arrow securities and show that, at these prices, no trade in securities takes place. In the same framework we prove that, with agents using the maxmin return criterion, sunspots do not matter.
|Item Type:||Report / Paper (Working Paper)|
|Research documents and activity classification:||Working Papers > Non-Refereed Working Papers / of national relevance only|
|Divisions:||Department of Business and Management|
|Additional Information:||This paper has been accepted and published in "Research in Economics", Vol. 3, 2006.|
|Uncontrolled Keywords:||General Equilibrium, Extrinsic Uncertainty, Complete Ignorance.|
|MIUR Scientific Area:||Area 13 - Economics and Statistics > SECS-P/01 Political Economy|
|Deposited By:||Maria Teresa Nistico|
|Deposited On:||25 Nov 2010 11:12|
|Last Modified:||25 Nov 2010 11:21|
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