A Welfare Criterion for Models with Distorted Beliefs

Wei Xiong, Alp Simsek and Markus Brunnermeier
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Wei Xiong: Department of Economics and Bendheim Cen
Alp Simsek: MIT

No 1418, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: This paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on whose belief is correct, our criterion asserts an allocation to be belief-neutral efficient (inefficient) if it is efficient (inefficient) under any convex combination of agents' beliefs. While this criterion gives an incomplete ranking of social allocations, it can identify positive- and negative-sum speculation driven by conflicting beliefs in a broad range of economic environments.

Date: 2014
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Related works:
Journal Article: A Welfare Criterion For Models With Distorted Beliefs (2014)
Working Paper: A Welfare Criterion for Models with Distorted Beliefs (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:1418

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