Pseudo-wealth and Consumption Fluctuations

Martin Guzman and Joseph Stiglitz

No 22838, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper provides an explanation for situations in which the state variables describing the economy do not change, but aggregate consumption experiences significant changes. We present a theory of pseudo-wealth—individuals’ perceived wealth that is derived from heterogeneous beliefs and expectations of gains in a bet. This wealth is divorced from real assets that may exist in society. The creation of a market for bets will imply positive pseudo-wealth. Changes in the differences of prior beliefs will lead to changes in expected wealth and hence to changes in consumption, implying ex-post intertemporal individual and aggregate consumption misallocations and instabilities. Thus, in the environment we describe, completing markets increases macroeconomic volatility, raising unsettling welfare questions.

JEL-codes: D60 D83 D84 E21 E32 (search for similar items in EconPapers)
Date: 2016-11
New Economics Papers: this item is included in nep-mac
Note: EFG IFM
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Citations: View citations in EconPapers (21)

Published as Martin Guzman & Joseph E Stiglitz, 2021. "Pseudo-wealth and Consumption Fluctuations," The Economic Journal, vol 131(633), pages 372-391.

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