Working Paper: NBER ID: w20691
Authors: Markus K. Brunnermeier; Alp Simsek; Wei Xiong
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 that an allocation is 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.
Keywords: Welfare Criterion; Distorted Beliefs; Behavioral Economics; Speculation
JEL Codes: D61; D62; D84; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| distorted beliefs (D91) | negative externalities (D62) |
| beliefs held by agents (L85) | social welfare outcomes (I38) |
| belief-neutral allocation (G40) | expected utility improvement (D81) |
| reasonable beliefs (D80) | transfers that improve expected utility (D81) |
| agents' beliefs (D83) | belief-neutral Pareto inefficiency (D63) |