A Welfare Criterion for Models with Distorted Beliefs

Markus Brunnermeier, Alp Simsek and Wei Xiong

No 20691, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D61 D62 D84 G12 G14 (search for similar items in EconPapers)
Date: 2014-11
Note: AP CF EFG PE
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Citations: View citations in EconPapers (128)

Published as Markus K. Brunnermeier & Alp Simsek & Wei Xiong, 2014. "A Welfare Criterion For Models With Distorted Beliefs," The Quarterly Journal of Economics, Oxford University Press, vol. 129(4), pages 1753-1797.

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Journal Article: A Welfare Criterion For Models With Distorted Beliefs (2014)
Working Paper: A Welfare Criterion for Models with Distorted Beliefs (2014)
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