A Welfare Criterion for Models with Biased Beliefs

Citation:
A Welfare Criterion for Models with Biased Beliefs, Brunnermeier, Markus K., Simsek Alp, and Xiong Wei , (In Progress)

Abstract:

This paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on whose belief is correct, our criterion asserts an allocation to be belief-neutral inefficient if it is inefficient under any convex combination of agents' beliefs. While this criterion gives an incomplete ranking of social allocations, it can identify negative-sum speculation in a broad range of prominent models with distorted beliefs.

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