Research / BFI Working PaperNov 05, 2020

Structured Ambiguity and Model Misspecification

A decision maker is averse to not knowing a prior over a set of restricted structured models (ambiguity) and suspects that each structured model is misspecified. The decision maker evaluates intertemporal plans under all of the structured models and, to recognize possible misspecifications, under unstructured alternatives that are statistically close to them. Likelihood ratio processes are used to represent unstructured alternative models, while relative entropy restricts a set of unstructured models. A set of structured models might be finite or indexed by a finite-dimensional vector of unknown parameters that could vary in unknown ways over time. We model such a decision maker with a dynamic version of variational preferences and revisit topics including dynamic consistency and admissibility.

More Research From These Scholars

BFI Working Paper May 8, 2023

Debt Moratoria: Evidence from Student Loan Forbearance

Michael Dinerstein, Constantine Yannelis, Ching-Tse Chen
Topics:  Fiscal Studies, Higher Education & Workforce Training
BFI Working Paper Oct 19, 2021

Robust Inference for Moment Condition Models without Rational Expectations

Xiaohong Chen, Lars Peter Hansen, Peter G. Hansen
Topics:  Uncategorized
BFI Working Paper Jun 22, 2023

Carbon Prices and Forest Preservation Over Space and Time in the Brazilian Amazon

Juliano J. Assunção, Lars Peter Hansen, Todd Munson, José A. Scheinkman
Topics:  Energy & Environment, Financial Markets