Beliefs and the net worth trap

Goutham Gopalakrishna, Seung Joo Lee and Theofanis Papamichalis

Journal of Economic Theory, 2025, vol. 227, issue C

Abstract: We develop a tractable framework to explore how beliefs about long-term economic growth shape macroeconomic and financial stability. By modeling belief distortions among productive capital users, we provide an analytical characterization of a novel phenomenon termed the “net worth trap”, wherein overly optimistic or pessimistic beliefs among productive agents prevent them from rebuilding wealth, causing permanent inefficiencies. A procyclical swing in beliefs reduces or exacerbates the instability, indicating that the type of belief when the economy is vulnerable has important consequences on financial stability and macroeconomic dynamics.

Keywords: Heterogeneous beliefs; Net worth trap; Return dynamics (search for similar items in EconPapers)
JEL-codes: E44 G01 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:227:y:2025:i:c:s0022053125000791

DOI: 10.1016/j.jet.2025.106033

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