Ambiguity Aversion and Trade

  title={Ambiguity Aversion and Trade},
  author={Luciano Irineu de Castro and Alain Chateauneuf},
What is the effect of ambiguity aversion on trade? Although in a Bewley’s model ambiguity aversion always lead to less trade, in other models this is not always true. However, we show that if the endowments are unambiguous then more ambiguity aversion implies less trade, for a very general class of preferences. The reduction in trade caused by ambiguity aversion can be as severe as to lead to no-trade. In an economy with MEU decision makers, we show that if the aggregate endowment is… CONTINUE READING

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