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Heterogeneity and learning with complete markets

Sergio Santoro ()
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Sergio Santoro: Bank of Italy

Economic Theory, 2017, vol. 64, issue 1, No 9, 183-211

Abstract: Abstract We study a complete markets endowment economy populated by two types of agents that have to learn equilibrium allocations. We show that market completeness allows agents to smooth consumption across states of nature, but not across time; as a result initial differences in beliefs induce persistent consumption imbalances that are not grounded in fundamentals. In some cases, these imbalances are not sustainable forever: the debt of one agent would grow unboundedly, and binding borrowing limits are necessary to prevent Ponzi schemes. Finally, we find that if a rational social planner attaches fixed Pareto weights to different individuals, financial autarky might be welfare superior to complete markets. The first best can be restored transferring consumption from the more optimistic agents to the others.

Keywords: Heterogeneous beliefs; Learning; Arrow securities; Borrowing limits (search for similar items in EconPapers)
JEL-codes: C62 D83 D84 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s00199-016-0980-5

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