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Oxford Economic Papers Advance Access originally published online on September 15, 2008
Oxford Economic Papers 2009 61(2):355-379; doi:10.1093/oep/gpn030
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© Oxford University Press 2008 All rights reserved

Ambiguity and social interaction

Jürgen Eichberger*, David Kelsey{dagger}, and Burkhard C. Schipper{ddagger}

*Alfred Weber Institut, Universität Heidelberg
{dagger}Department of Economics,University of Exeter, Exeter, EX4 4PU;
{ddagger}Department of Economics, University of California, Davis

Correspondence: e-mail D.Kelsey{at}exeter.ac.uk

JEL classifications: C72, D43, D62, D81


  Abstract

A decision-maker is said to have an ambiguous belief if it is not precise enough to be represented by a single probability distribution. The pervasive assumption in game theoretic models in economics is that players' beliefs are unambiguous. This paper argues, drawing on examples from economics and politics, that it may be illuminating, in instances, to model players as having ambiguous beliefs. 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. In addition the effects of ambiguity on peace-making are examined. It is shown that ambiguity may select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.


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