Luca Rigotti

Subjective Beliefs and ex ante Trade

We study a definition of subjective beliefs applicable to preferences that allow for the perception of ambiguity, and provide a characterization of such beliefs in terms of market behavior. Using this definition, we derive necessary and sufficient conditions for the efficiency of ex ante trade and show that these conditions follow from the fundamental welfare theorems. When aggregate uncertainty is absent, our results show that full insurance is efficient if and only if agents share some common subjective beliefs. Our results hold for a general class of convex preferences, which contains many functional forms used in applications involving ambiguity and ambiguity aversion. We show how our results can be articulated in the language of these functional forms, confirming results existing in the literature, generating new results, and providing a useful tool for applications.

Sharing risk and ambiguity

We study the market implications of ambiguity in common models. We show that generic determinacy is a robust feature in general equilibrium models that allow a distinction between ambiguity and risk.

Knightian Uncertainty and Moral Hazard

This paper presents a principal-agent model in which the agent has imprecise beliefs. We model this situation formally by assuming the agent[modifier letter apostrophe]s preferences are incomplete as in Bewley (1986) [2]. In this setting, incentives must be robust to Knightian uncertainty. We study the implications of robustness for the form of the resulting optimal contracts. We give conditions under which there is a unique optimal contract, and show that it must have a simple flat payment plus bonus structure. That is, output levels are divided into two sets, and the optimal contract pays the same wage for all output levels in each set. We derive this result for the case in which the agent[modifier letter apostrophe]s utility function is linear and then show it also holds if this utility function has some limited curvature.

Imprecise Beliefs in a Principal Agent Model

This paper presents a principal-agent model where the agent has multiple, or imprecise, beliefs. We model this situation formally by assuming the agents preferences are incomplete. One can interpret this multiplicity as an agents limited knowledge of the surrounding environment. In this setting, incentives need to be robust to the agents different beliefs. We study whether robustness implies simplicity. Under mild conditions, we show the unique optimal contract has a two-wage structure; a °at payment and bonus. That is, all output levels are divided into two groups, and the optimal incentive scheme pays the same amount for all output levels in each group. We also show that a two-state two-action framework can be thought of as a reduced form of the original model. We solve explicitly the principals problem in this case, and discuss some implications of our model for firm ownership.