Subjective Beliefs and Ex Ante Trade

25 Pages Posted: 22 Sep 2013

See all articles by Luca Rigotti

Luca Rigotti

University of Pittsburgh - Department of Economics

Chris Shannon

University of California, Berkeley

Tomasz Strzalecki

Harvard University - Harvard Institute of Economic Research

Date Written: September 1, 2008

Abstract

We study a definition of subjective beliefs applicable to preferences that allow for the perception of ambiguity, and provide a characterization of such beliefs in terms of market behavior. Using this definition, we derive necessary and sufficient conditions for the efficiency of ex ante trade and show that these conditions follow from the fundamental welfare theorems. When aggregate uncertainty is absent, our results show that full insurance is efficient if and only if agents share some common subjective beliefs. Our results hold for a general class of convex preferences, which contains many functional forms used in applications involving ambiguity and ambiguity aversion. We show how our results can be articulated in the language of these functional forms, confirming results existing in the literature, generating new results, and providing a useful tool for applications.

Keywords: Common prior, absence of trade, ambiguity aversion, general equilibrium

Suggested Citation

Rigotti, Luca and Shannon, Chris and Strzalecki, Tomasz, Subjective Beliefs and Ex Ante Trade (September 1, 2008). Econometrica, Vol. 76, No. 5, September 2008. Available at SSRN: https://ssrn.com/abstract=2328901

Luca Rigotti

University of Pittsburgh - Department of Economics ( email )

4901 Wesley Posvar Hall
230 South Bouquet Street
Pittsburgh, PA 15260
United States

Chris Shannon

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Tomasz Strzalecki (Contact Author)

Harvard University - Harvard Institute of Economic Research ( email )

Department of Economics
200 Littauer Center
Cambridge, MA 02138
United States

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