This paper shows that a unique and additive subjective belief can be derived from choice behavior that reveals Ellsberg-type ambiguity aversion. This belief is obtained as a component of a utility representation where subjective probabilities are contaminated by an exogenous information set. This representation delivers a parameter that is interpretable as a degree of the decision maker’s confi...

We introduce ambiguity about the asset value dynamics of a firm into trade-off framework capital structure. characterize investors’ preferences by recursive multiple priors utility. show that equity holders’ aversion significantly reduces optimal leverage and debt capacity. In particular, holders with sufficiently strong perceive their to be “too valuable lose” upon bankruptcy therefore optimal...

Economic evaluation of climate policy traditionally treats uncertainty by appealing to expected utility theory. Yet our knowledge of the impacts of climate policy may not be of sufficient quality to justify probabilistic beliefs. In such circumstances, it has been argued that the axioms of expected utility theory may not be the correct standard of rationality. By contrast, several axiomatic fra...

The paper extends a dynamic version of the classical von NeumannMorgenstern setting to incorporate a degree of confidence in or subjectivity of probabilistic beliefs. It provides a simple axiomatic characterization of a new preference representation that addresses ambiguity from a simple perspective, employing only basic tools from risk analysis. Conceptually, the paper renders the concept of s...

Most models of ambiguity aversion satisfy Anscombe-Aumann’s Monotonicity axiom. This paper proposes a test of Monotonicity, the Allais Horse Race. It is an adaptation of the Allais paradox to a setting with both subjective and objective uncertainty. Viewed as a thought experiment, the Allais Horse Race allows for introspective assessment of Monotonicity. Implementing it as an incentivized exper...