Eichberger, Jürgen Kelsey, David H. Schipper, Burkhard C.
Year of Publication:
Bonn Econ Discussion Papers 23/2003
We examine the impact of ambiguity on economic behaviour. We present a relatively non-technical account of ambiguity and show how it may be applied in economics. Optimistic and pessimistic responses to ambiguity are formally modelled. We show that pessimism has the effect of increasing (decreasing) equilibrium prices under Cournot (Bertrand) competition. We also examine the effects of ambiguity on peace processes. It is shown that ambiguity can act to select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.