A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models

48 Pages Posted: 4 Jan 2018 Last revised: 27 Feb 2021

See all articles by Jeong Ho (John) Kim

Jeong Ho (John) Kim

Emory University - Department of Economics

Byung-Cheol Kim

University of Alabama

Date Written: February 26, 2021

Abstract

Belief disagreement generates a fundamental tension between two desirable features of a resource allocation: Pareto optimality and risk sharing. While Pareto optimality generally opposes restrictions to trade, a growing literature rejects it in the presence of heterogeneous beliefs and proposes welfare criteria that instead assume risk sharing as fundamentally desirable. We propose a welfare criterion that balances out these two desirable features by endogenously determining admissible welfare weights based on competitive equilibrium allocation as a benchmark. Applying our method to several belief disagreement models, we show how the welfare-optimal degree of risk sharing is between those suggested by Pareto optimality (which implies less) and by other existing approaches (which imply more).

Keywords: Welfare criterion; Heterogeneous beliefs; Spurious unanimity; Risk sharing; Pareto optimality; Financial regulation

JEL Classification: D61, D71, D84, G12, G18.

Suggested Citation

Kim, Jeong Ho (John) and Kim, Byung-Cheol, A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models (February 26, 2021). Available at SSRN: https://ssrn.com/abstract=3094759 or http://dx.doi.org/10.2139/ssrn.3094759

Jeong Ho (John) Kim (Contact Author)

Emory University - Department of Economics ( email )

1602 Fishburne Drive
Atlanta, GA 30322
United States

HOME PAGE: http://economics.emory.edu/home/people/faculty/kim-john.html

Byung-Cheol Kim

University of Alabama ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
7708462727 (Phone)
7708462727 (Fax)

HOME PAGE: http://https://sites.google.com/site/byungcheolkim76/

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