A Welfare Criterion for Models with Distorted Beliefs

48 Pages Posted: 15 Mar 2012

See all articles by Markus K. Brunnermeier

Markus K. Brunnermeier

Princeton University - Department of Economics

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2012

Abstract

This paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on agents' beliefs, 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. A common feature of these models is that each agent believes that he can make a profit at a greater expense of others.

JEL Classification: G10, D63

Suggested Citation

Brunnermeier, Markus Konrad and Simsek, Alp and Xiong, Wei, A Welfare Criterion for Models with Distorted Beliefs (February 1, 2012). Available at SSRN: https://ssrn.com/abstract=2021600 or http://dx.doi.org/10.2139/ssrn.2021600

Markus Konrad Brunnermeier

Princeton University - Department of Economics ( email )

Bendheim Center for Finance
Princeton, NJ
United States
609-258-4050 (Phone)
609-258-0771 (Fax)

HOME PAGE: http://www.princeton.edu/¡­markus

Alp Simsek

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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HOME PAGE: http://https://economics.mit.edu/faculty/asimsek

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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HOME PAGE: http://https://economics.mit.edu/faculty/asimsek

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Wei Xiong (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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