Knight--Walras Equilibria

Knightian uncertainty leads naturally to nonlinear expectations. We introduce a corresponding equilibrium concept with sublinear prices and establish their existence. In general, such equilibria lead to Pareto inefficiency and coincide with Arrow–Debreu equilibria only if the values of net trades are ambiguity–free in the mean. Without aggregate uncertainty, inefficiencies arise generically. We introduce a constrained efficiency concept, uncertainty–neutral efficiency and show that Knight–Walras equilibrium allocations are efficient in this constrained sense. Arrow–Debreu equilibria turn out to be non–robust with respect to the introduction of Knightian uncertainty.