Abstract
AbstractIn environments with expected utility, it has long been established that speculative trade cannot occur and that the value of public information is negative in economies with risk‐sharing and no aggregate uncertainty. We show that these results are still true even if we relax expected utility, so that either Dynamic Consistency (DC) or Consequentialism is violated. We characterize no speculative trade in terms of a weakening of DC and find that Consequentialism is not required. Moreover, we show that a weakening of both DC and Consequentialism is sufficient for the value of public information to be negative. We therefore generalize these important results for convex preferences which contain several classes of ambiguity averse preferences.
Highlights
In markets with subjective expected utility (SEU), it has long been established by Milgrom and Stokey (1982) that speculative trade cannot occur
The first is Dynamic Consistency (DC), which requires that an action plan is optimal when evaluated with the updated preferences of a later period, if and only if it is optimal when evaluated with the preferences of an earlier period
The purpose of this paper is to examine whether no speculative trade and the negative value of public information for mutual insurance are still valid in general models with convex preferences, where either DC or Consequentialism is violated
Summary
In markets with subjective expected utility (SEU), it has long been established by Milgrom and Stokey (1982) that speculative trade cannot occur. The purpose of this paper is to examine whether no speculative trade and the negative value of public information for mutual insurance are still valid in general models with convex preferences, where either DC or Consequentialism is violated.
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