Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs
47 Pages Posted: 9 Apr 2015
Date Written: November 20, 2013
Two types of agents have diverse beliefs about the law of motion for an exogenous endowment. One type knows the true law of motion and the other learns about it via Bayes’ theorem. Financial market structure affects the dynamics of the distribution of financial wealth. When markets are complete, the learning agent loses wealth, as in Blume and Easley (2006). The absence of markets for some Arrow securities alters the direction in which wealth is transferred relative to a complete markets economy. In an economy in which only a risk-free bond is traded, the learning agent accumulates wealth, both agents survive asymptotically, and the more knowledgeable agent is driven to his debt limit.
Keywords: Wealth dynamics, survival, incomplete markets, diverse beliefs, learning
JEL Classification: D52, D53, D83, D84
Suggested Citation: Suggested Citation