Becker Friedman Institute

Research Repository

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

A Welfare Criterion for Models with Distorted Beliefs

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.

Markus Brunnermeier, Princeton University
Alp Simsek, MIT
Wei Xiong, Princeton University
Publication Date: 
June, 2012
Publication Status: