We offer a theory of polarization as an optimal response to ambiguity. Suppose individual A's beliefs first-order stochastically dominate individual B's. They observe a common signal. They exhibit polarization if A's posterior dominates her prior and B's prior dominates her posterior. Given...

This paper axiomatizes an intertemporal version of the Smooth Ambiguity decision model developed in [P. Klibanoff, M. Marinacci, S. Mukerji, A smooth model of decision making under ambiguity, Econometrica 73 (6) (2005) 1849-1892]. A key feature of the model is that it achieves a separation...

We provide a model of closed-end fund pricing which includes investors who do not form expectations correctly and allows for salient country-specific news to affect this expectation formation process. We use panel data on prices and net asset values of closed- end country funds to examine...

We propose and characterize a model of preferences over acts such that the decision maker prefers act f to act g if and only if <openface>E</openface>_μφ( <openface>E</openface>_πu&cir;f) &ges; <openface>E</openface>_μφ( <openface>E</openface>_πu&cir;g), where <openface>E</openface> is the expectation operator, u is a von Neumann-Morgenstern utility function, φis an increasing transformation, and μis a...

In the competitive model, externalities lead to inefficiencies and inefficiencies increase with the size of externalities. However, as argued by R. H. Coase (1960), these problems may be mitigated in a decentralized system through voluntary coordination. The authors show how coordination is...