ABSTRACT We introduce ambiguity (Knightian uncertainty) into a stripped-down version of Alesina&a... more ABSTRACT We introduce ambiguity (Knightian uncertainty) into a stripped-down version of Alesina's (1987) partisan model of the business cycle. We show that, if the private sector's subjective expectations of future events are ambiguous, there is the possibility of a political business cycle, even when the parties running for the election have similar preferences for inflation and unemployment. In particular, if inflation is perceived as a loss, then the larger the fraction of the population that is ambiguity-prone (-averse), the larger is the postelection boom (slump), with unemployment then returning back to its natural level. We also show that, for given parties preferences, ambiguity proneness (aversion) implies smaller (larger) fluctuations in the unemployment around its natural level when the right-wing party wins the elections. (Keywords: Ambiguity, Ellsberg's paradox, Partisan theory of the business cycle, Unemployment)
By Carmela Di Mauro and Anna Maffioletti; The Impact of Ambiguity on the Valuation of Self-Insura... more By Carmela Di Mauro and Anna Maffioletti; The Impact of Ambiguity on the Valuation of Self-Insurance and Self-Protection.
In a laboratory experiment we test the hypothesis that consumers' valuation of insurance is sensi... more In a laboratory experiment we test the hypothesis that consumers' valuation of insurance is sensitive to the amount of information available on the probability of a potential loss. In order to test this hypothesis we simulate a market in which we elicit individuals' willingness to pay to insure against a loss characterised either by known or else vague probabilities. We use two distinct treatments by providing subjects with different information over the vague probabilities of loss. In general we find that uncertainty about probabilities has a weak impact on consumers' valuation of insurance. However, additional information about probabilities tends to marginally increase the price individuals are willing to pay to insure themselves. Implications for the insurance market are derived.
In a series of experiments the interactions among individual attitudes towards risk and uncertain... more In a series of experiments the interactions among individual attitudes towards risk and uncertainty, the sign of the outcome domain, and the way uncertainty is represented are tested. This is done in a unified framework, eliciting individual values by means of a second price auction. Results confirm the presence of the well-known fourfold pattern of risk attitude (risk aversion for gains and risk seeking for losses at high probability, and risk seeking for gains and risk aversion for losses at low probability) and show that this pattern can also be extended to uncertainty. In the valuation of losses the modal pattern is decreasing risk and uncertainty aversion as the probability of loss increases, while increasing risk and uncertainty aversion is observed for gains. Moreover, it is found that the size of reaction to uncertainty does not depend on the outcome domain, and that it persists in the face of an incentive-compatible mechanism to elicit preferences.
ABSTRACT We introduce ambiguity (Knightian uncertainty) into a stripped-down version of Alesina&a... more ABSTRACT We introduce ambiguity (Knightian uncertainty) into a stripped-down version of Alesina's (1987) partisan model of the business cycle. We show that, if the private sector's subjective expectations of future events are ambiguous, there is the possibility of a political business cycle, even when the parties running for the election have similar preferences for inflation and unemployment. In particular, if inflation is perceived as a loss, then the larger the fraction of the population that is ambiguity-prone (-averse), the larger is the postelection boom (slump), with unemployment then returning back to its natural level. We also show that, for given parties preferences, ambiguity proneness (aversion) implies smaller (larger) fluctuations in the unemployment around its natural level when the right-wing party wins the elections. (Keywords: Ambiguity, Ellsberg's paradox, Partisan theory of the business cycle, Unemployment)
By Carmela Di Mauro and Anna Maffioletti; The Impact of Ambiguity on the Valuation of Self-Insura... more By Carmela Di Mauro and Anna Maffioletti; The Impact of Ambiguity on the Valuation of Self-Insurance and Self-Protection.
In a laboratory experiment we test the hypothesis that consumers' valuation of insurance is sensi... more In a laboratory experiment we test the hypothesis that consumers' valuation of insurance is sensitive to the amount of information available on the probability of a potential loss. In order to test this hypothesis we simulate a market in which we elicit individuals' willingness to pay to insure against a loss characterised either by known or else vague probabilities. We use two distinct treatments by providing subjects with different information over the vague probabilities of loss. In general we find that uncertainty about probabilities has a weak impact on consumers' valuation of insurance. However, additional information about probabilities tends to marginally increase the price individuals are willing to pay to insure themselves. Implications for the insurance market are derived.
In a series of experiments the interactions among individual attitudes towards risk and uncertain... more In a series of experiments the interactions among individual attitudes towards risk and uncertainty, the sign of the outcome domain, and the way uncertainty is represented are tested. This is done in a unified framework, eliciting individual values by means of a second price auction. Results confirm the presence of the well-known fourfold pattern of risk attitude (risk aversion for gains and risk seeking for losses at high probability, and risk seeking for gains and risk aversion for losses at low probability) and show that this pattern can also be extended to uncertainty. In the valuation of losses the modal pattern is decreasing risk and uncertainty aversion as the probability of loss increases, while increasing risk and uncertainty aversion is observed for gains. Moreover, it is found that the size of reaction to uncertainty does not depend on the outcome domain, and that it persists in the face of an incentive-compatible mechanism to elicit preferences.
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