2005 | OriginalPaper | Buchkapitel
Ambiguity aversion and the absence of indexed debt
verfasst von : Sujoy Mukerji, Jean-Marc Tallon
Erschienen in: Essays in Dynamic General Equilibrium Theory
Verlag: Springer Berlin Heidelberg
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Following the seminal works of Schmeidler (1989), Gilboa and Schmeidler (1989), roughly put, an agent’s subjective beliefs are said to be
ambiguous
if the beliefs may not be represented by a unique probability distribution, in the standard Bayesian fashion, but instead by a set of probabilities. An
ambiguity averse
decision maker evaluates an act by the minimum expected value that may be associated with it.
In spite of wide and long-standing support among economists for indexation of loan contracts there has been relatively little use of indexation, except in situations of extremely high inflation. The object of this paper is to provide a (theoretical) explanation for this puzzling phenomenon based on the hypothesis that economic agents are
ambiguity averse
. The present paper considers a general equilibrium model based on (Magill and Quinzii, 1997), with ambiguity averse agents, where both nominal and indexed bond contracts are available for trade and all relevant prices are determined endogenously. We obtain conditions which prompt an
endogenous
cessation of trade in indexed bonds: i.e., conditions under which there is no trade in indexed bonds in
any
equilibrium; only nominal bonds are traded. We argue that the obtained conditions mirror the known stylized facts about trade in indexed financial contracts.