.Equilibrium Wealth and Consumption Inequality under Ambiguity Aversion [PDF version]
Abstract: Ambiguity aversion has been widely studied theoretically and experimentally in recent decades. How do agents’ optimal decisions and equilibrium outcomes change, bearing in mind this potential misspecification? To answer this question, this paper establishes a continuous-time general equilibrium heterogeneous-agent model with ambiguity aversion to study its effect on wealth and consumption inequality. We find that the preference for ambiguity aversion reduces the interest rate, increases the risk premium, and reduces wealth and consumption inequality in the general equilibrium. Finally, we examine the welfare effects of ambiguity aversion in general equilibrium.
Abstract: Ambiguity aversion has been widely studied theoretically and experimentally in recent decades. How do agents’ optimal decisions and equilibrium outcomes change, bearing in mind this potential misspecification? To answer this question, this paper establishes a continuous-time general equilibrium heterogeneous-agent model with ambiguity aversion to study its effect on wealth and consumption inequality. We find that the preference for ambiguity aversion reduces the interest rate, increases the risk premium, and reduces wealth and consumption inequality in the general equilibrium. Finally, we examine the welfare effects of ambiguity aversion in general equilibrium.