A Welfare Criterion For Models With Distorted Beliefs

By Markus K. Brunnermeier, Alp Simsek. 2014

207 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/89a9f83043d0e8e9622266a82dc3731c69247591

Citations in the corpus

• Macroeconomics with Financial Frictions: A Survey (2012, unknown): “Recently , Brunnermeier , Simsek , and Xiong ( 2011 ) developed a welfare criterion that can be applied to all models with hetereogenous beliefs .”
• Bubbles, Financial Crises, and Systemic Risk (2012, unknown): “Based on this, Brunnermeier, Simsek, and Xiong (2012) develop a welfare criterion for settings with heterogeneous beliefs.”