Smoothing preference kinks with information

We identify conditions under which receipt of information in the form of a (potentially) ambiguous signal leads to a smoother maximin expected utility (MEU) preference structure which translates behaviorally into a smaller no-trade price zone. Narrowing of the no-trade price zone depends critically on the rectangularity of the belief structure, which, in the context of an MEU model, is a requirement of dynamic consistency in Machina's sense. Another important factor affecting the size of the no-trade price zone is the relative contribution of ambiguity in signals and ambiguity in posterior beliefs to the degree of prior ambiguity over market events.