Do sunspots matter under complete ignorance?
Journal
Research in Economics
ISSN
1090-9443
ISSN-Digital
1090-9451
Type
journal article
Date Issued
2006-09-01
Author(s)
Abstract
In a two-period, sunspot, pure-exchange economy we analyse 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. 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 [Milnor, J., 1954. Games against nature. In: Thrall, R. Coombs, C., Davis, R. (Eds.), Decision Processes. John Wiley, London, pp. 49-60]): the ‘minimax regret criterion' [Savage, L.J., 1954. The Foundations of Statistics. Wiley, New York, ch. 9] and the ‘maxmin return criterion' [Wald, A., 1950. Statistical Decision Functions. Wiley, New York]. 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.
Language
English
Keywords
General equilibrium
extrinsic uncertainty
complete ignorance
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Economic Policy
Refereed
Yes
Publisher
Elsevier Science
Publisher place
Amsterdam
Volume
60
Number
3
Start page
148
End page
154
Pages
7
Subject(s)
Eprints ID
222068