Economic Theory

, Volume 30, Issue 2, pp 363–372 | Cite as

Aggregation under homogeneous ambiguity: a two-fund separation result

Exposita Note
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Abstract

Contrary to the common prior model, the construction of a representative agent whose preferences follow the multiple-priors model (1989) requires strong restrictions on sets of priors and on an aggregate endowment process if we permit a large deviation among agents’ degrees of risk aversion. This paper shows that if agents’ felicity functions belong to a family of linear risk tolerance functions with the same marginal risk tolerance, the representative agent always exists at an interior equilibrium without such restrictions, and two-fund separation holds

Keywords

Aggregation Ambiguity Fund-separation Multiple priors Representative agent Uncertainty aversion 

JEL Classification Numbers

D50 D81 G11 
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Copyright information

© Springer-Verlag 2005

Authors and Affiliations

  1. 1.Department of EconomicsThe State University of New York at BuffaloBuffaloUSA

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