Pseudo-Wealth and Consumption Fluctuations

37 Pages Posted: 21 Nov 2016

See all articles by Martin Guzman

Martin Guzman

Columbia University

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: November 2016

Abstract

This paper provides an explanation for situations in which the state variables describing the economy do not change, but aggregate consumption experiences significant changes. We present a theory of pseudo-wealth—individuals’ perceived wealth that is derived from heterogeneous beliefs and expectations of gains in a bet. This wealth is divorced from real assets that may exist in society. The creation of a market for bets will imply positive pseudo-wealth. Changes in the differences of prior beliefs will lead to changes in expected wealth and hence to changes in consumption, implying ex-post intertemporal individual and aggregate consumption misallocations and instabilities. Thus, in the environment we describe, completing markets increases macroeconomic volatility, raising unsettling welfare questions.

Suggested Citation

Guzman, Martin and Stiglitz, Joseph E., Pseudo-Wealth and Consumption Fluctuations (November 2016). NBER Working Paper No. w22838. Available at SSRN: https://ssrn.com/abstract=2873311

Martin Guzman (Contact Author)

Columbia University ( email )

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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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