An Chen

Universität Ulm

Title

The Role of Ambiguity Aversion in Consumer Purchasing Decision

Authors

An Chen and Shihao Zhu

Abstract

This paper studies a representative consumer's contingent consumption plan in an ambiguous environment in which the probability of a state occurring is uncertain and the utility is state-dependent. We characterize the conditions that ambiguity aversion leads to an increase or decrease in the consumption good in the $\alpha$-maxmin and smooth ambiguity models. Our main results show that comparative statics of ambiguity aversion are about levels of utility while the optimal consumption plan is about marginals, so the effects of ambiguity aversion are non-obvious in some settings. We apply our findings to life insurance and life annuity decisions, where individuals face uncertain mortality risks, as well as to insurance for irreplaceable commodities, where individuals confront uncertain health risks.