NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

A Welfare Criterion for Models with Distorted Beliefs

Markus K. Brunnermeier, Alp Simsek, Wei Xiong

NBER Working Paper No. 20691
Issued in November 2014, Revised in February 2015
NBER Program(s):   AP   CF   EFG   PE

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.

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Document Object Identifier (DOI): 10.3386/w20691

Published: 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. citation courtesy of

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