Decision Under Ambiguity via Intermediate Microeconomics

29 Pages Posted: 8 May 2019 Last revised: 30 Sep 2023

See all articles by Simon Grant

Simon Grant

Rice University - Department of Economics; Australian National University

Patricia Rich

University of Bayreuth

Jack Douglas Stecher

University of Alberta - Department of Accounting, Operations & Information Systems

Date Written: September 25, 2023

Abstract

The goal of this paper is to present a unifying theory of decision-making under ambiguity. We present a theory that nests several of the existing models and captures special cases of others. Our theory requires no more technical background than found in intermediate microeconomics, and provides a natural interpretation of ambiguity attitude (it corresponds to a marginal rate of substitution). We illustrate the insights our model generates by applying it to a problem of lending with possible strategic default, in which the borrower’s future wealth is ambiguous. To show that our theory rests on a solid foundation, we then provide an axiomatization. To summarize, our model generalizes existing theories, has a low barrier to entry, and is straightforward to work with.

Keywords: ambiguity, pessimism, optimism, expected utility, costly state verification

JEL Classification: D80, D81

Suggested Citation

Grant, Simon Harold and Rich, Patricia and Stecher, Jack Douglas, Decision Under Ambiguity via Intermediate Microeconomics (September 25, 2023). Available at SSRN: https://ssrn.com/abstract=3369078 or http://dx.doi.org/10.2139/ssrn.3369078

Simon Harold Grant

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States
713-348-3332 (Phone)
713-348-6329 (Fax)

Australian National University ( email )

Coombs Building 9
Canberra, Australian Capital Territory 0200
Australia
61-2-6125-4602 (Phone)
61-2-6125-3051 (Fax)

Patricia Rich (Contact Author)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447
Germany

Jack Douglas Stecher

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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