A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models

48 Pages Posted: 4 Jan 2018 Last revised: 14 Sep 2021

See all articles by Jeong Ho (John) Kim

Jeong Ho (John) Kim

Florida State University - Department of Finance

Byung-Cheol Kim

University of Alabama

Date Written: September 4, 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 and Kim, Byung-Cheol, A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models (September 4, 2021). Available at SSRN: https://ssrn.com/abstract=3094759 or http://dx.doi.org/10.2139/ssrn.3094759

Jeong Ho Kim (Contact Author)

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States

Byung-Cheol Kim

University of Alabama ( email )

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

HOME PAGE: http://bkim.people.ua.edu/

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