We test the implications of ambiguity aversion in a principal-agent problem with multiple agents. Models of ambiguity aversion suggest that, under ambiguity, comparative compensation schemes may become more attractive than independent wage contracts. We test this by presenting agents with a choice between comparative reward schemes and independent contracts, which are designed such that under u...

Al-Najjar and Weinstein 2009 propose to scrutinize the implications of recent theories of ambiguity in dynamic settings. They conclude that such implications are so unreasonable as to cast doubts on the legitimacy of the theories under consideration. The present paper argues that the seemingly unreasonable implications highlighted by Al-Najjar and Weinstein can be understood as the result of ba...

Under which condition does the set of desirable uncertain prospects expand when wealth increases? We show that the decreasing concavity (DC) of the utility function  is necessary and sufficient in the −maxmin expected utility model. In the smooth ambiguity aversion model with the ambiguity valuation function , the DC of  and of ◦ is necessary and sufficient. An alternative definition of d...

Loss Set A Set A Set A Set A Investment Set B Set B Set B Set B Insurance Set B Set B Set B Set B Furthermore, the subjects face four different types of information in both decision frames and treatments. The ‘precise’ information frame has exact probabilities and exact payments stated. In the ‘ambiguity in probability’ frames, the probability is stated as a range and the payment is fixed. Conv...

Uncertainty has an almost negligible impact on project value in the standard economic model. I show that a comprehensive evaluation of uncertainty and uncertainty attitude changes this picture fundamentally. The illustration of this result relies on the discount rate, which is the crucial determinant in balancing immediate costs against future benefits, and the single most important determinant...

This study provides novel evidence on the role of ambiguity aversion in determining the response of mutual fund investors to historical fund performance information. We present a model of ambiguity averse investors who receive multiple performance-based signals of uncertain precision about manager skill. A key implication of the model is that when investors receive multiple signals of uncertain...

Why don’t people in developing countries insure themselves? I propose that some households are ambiguity averse, and that these households fear any insurance contract they purchase will payout when it is not needed and will not payout when it is. I study two applications of this observation. I first study formal crop insurance, in particular index insurance and the insurance element of limited ...