Equilibria Under Knightian Price Uncertainty

Patrick Beissner, Frank Riedel

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    Abstract

    We study economies with Knightian uncertainty about state prices. We introduce an equilibrium concept with sublinear prices and prove that equilibria exist under weak conditions. In general, such equilibria lead to inefficient allocations; they coincide with Arrow–Debreu equilibria if and only if the values of net trades are ambiguity-free in mean. In economies without aggregate uncertainty, inefficiencies are generic. Equilibrium allocations under price uncertainty are efficient in a constrained sense that we call uncertainty–neutral efficient. Arrow–Debreu equilibria turn out to be non-robust with respect to the introduction of Knightian uncertainty.

    Original languageEnglish
    Pages (from-to)37-64
    Number of pages28
    JournalEconometrica
    Volume87
    Issue number1
    DOIs
    Publication statusPublished - Jan 2019

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