Essays on Ambiguity Aversion and Externalities

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2022

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This dissertation studies the interaction between ambiguity aversion and externalities in macroeconomic models. It considers this interaction in three different settings each developed in chapters 2, 3, and 4. Chapter 2 studies optimal portfolio choice where any given investor values returns relative to other investors' while facing ambiguity with respect to how returns are distributed. In this context, ambiguity introduces multiple equilibria, a subset of which seems, from an ambiguity neutral standpoint, as optimistic behavior while another subset appears to come from investors holding pessimistic beliefs. The model predicts that higher ambiguity relates to potentially higher degrees of over-pricing as well as under-pricing. Evidence from the pricing of recently public stocks is consistent with these predictions. Chapter 3 considers optimal macroprudential policy in an endowment economy with occasionally binding collateral constraints where households and the social planner face ambiguity with respect to the endowment process. In this setup, the decentralized equilibrium may differ from the social planner's both because of the pecuniary externalities associated with the collateral constraint and because of the paternalistic imposition of the planner's beliefs. The paternalism channel can amplify, attenuate, and even reverse welfare gains from policy intervention. Chapter 4 presents a static general equilibrium model with demand externalities and dispersed information where ambiguity-averse firms lack confidence in the joint distribution of their information. This lack of confidence, together with positive demand externalities, induces an asymmetric treatment of information which leads firms to respond more aggressively to bad news than to good news. This results in a downward-shifted and concave hiring rules which leads to lower aggregate employment growth that is more dispersed and more left-skewed in the cross-section. Empirical evidence shows a relation between moments of employment growth and ambiguity that are consistent with model predictions.

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Bennett, Federico Roberto (2022). Essays on Ambiguity Aversion and Externalities. Dissertation, Duke University. Retrieved from https://hdl.handle.net/10161/26851.

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