Preprint C186/2015
On the role of Ambiguity in General Equilibrium: Finite and Infinite Horizon Economies
Juan Pablo Gama Torres
Keywords: General Equilibrium | ambiguity | Ambiguity Loving | Aggre- gate Risk | Wariness | Money | Efficient Bubbles | Crashing

Although implementation of different type of attitudes towards uncertainty
in General Equilibrium seems to be completely natural, has not be completely
studied. In this work, we presents two form: with ambiguity/risk loving and
ambiguity as lack of impatience (Wariness).
We show that the aggregate risk of wealth plays a role in the existence of
equilibrium in Arrow-Debreu economies. Moreover, we study properties of
the equilibrium allocations such as condition for risk sharing and the price
behavior in equilibrium in presence of regulation, and, the decomposition in
the risk factor and the ambiguity factor in these prices in some special cases.
Our analyses suggest that regulation increases volatility while reduces the
social welfare of the economy, however the risk lovers or optimists are those
who perceive the larger losses.
We show that, contrary to what happens under purely discounted utility,
efficient allocations to wary agents are implemented with a non-vanishing
money supply. In fact, the hedging rule of money does not disappear over
time and, therefore, the transversality condition allows for consumers to be
creditors at infinity. The implementation scheme starts by allocating money
and then, at subsequent dates, taxes money balances that deviate from the
efficient path. We address also why fiat money does not lose its value when
Lucas trees are available and why we might not want to replace money by a
tree. And finally, we expose conditions for the existence of stochastic efficient
bubbles, which suggest the possibility of crashing under some conditions.