A welfare criterion for models with distorted beliefs

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Abstract

This article 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. Although 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.

Original languageEnglish (US)
Pages (from-to)1753-1797
Number of pages45
JournalQuarterly Journal of Economics
Volume129
Issue number4
DOIs
StatePublished - Nov 1 2014

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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