A welfare criterion with endogenous welfare weights for belief disagreement models

Kim, Jeong Ho (John) and Byung-Cheol Kim
Authors registered in the RePEc Author Service: Jeong Ho (John) Kim

Journal of Economic Behavior & Organization, 2021, vol. 191, issue C, 312-333

Abstract: Belief disagreement generates a fundamental tension between two desirable features of a resource allocation: Pareto optimality and risk sharing. While Pareto optimality generally opposes restrictions to trade, a growing literature rejects it in the presence of heterogeneous beliefs and proposes welfare criteria that instead assume risk sharing as fundamentally desirable. We propose a welfare criterion that balances out these two desirable features by endogenously determining admissible welfare weights based on competitive equilibrium allocation as a benchmark. Applying our method to several belief disagreement models, we show how the welfare-optimal degree of risk sharing is between those suggested by Pareto optimality (which implies less) and by other existing approaches (which imply more).

Keywords: Welfare criterion; Heterogeneous beliefs; Spurious unanimity; Risk sharing; Pareto optimality; Financial regulation (search for similar items in EconPapers)
JEL-codes: D61 D71 D84 G12 G18 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:191:y:2021:i:c:p:312-333

DOI: 10.1016/j.jebo.2021.09.006

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