A Welfare Criterion with Endogenous Welfare Weights for Belief Disagreement Models

41 Pages Posted: 4 Jan 2018 Last revised: 5 Oct 2020

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: October 4, 2020

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 sensible welfare weights based on competitive equilibrium allocation as a benchmark. Applying our method to several belief disagreement models, we show how lax financial regulations can lead to welfare improvements over no regulation (as per Pareto optimality) and over tight regulation (as per other existing approaches).

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 (October 4, 2020). 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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