A Welfare Criterion for Models with Biased Beliefs

Publication Year
2014

Type

Journal Article
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 an allocation to be belief-neutral inefficient if it is inefficient under any convex combination of agents' beliefs. While this criterion gives an incomplete ranking of social allocations, it can identify negative-sum speculation in a broad range of prominent models with distorted beliefs.

Journal
Quarterly Journal of Economics
Volume
129
Issue
4
Pages
1711-1752