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- Title
Heterogeneity and learning with complete markets.
- Authors
Santoro, Sergio
- Abstract
We study a complete markets endowment economy populated by two types of agents that have to learn equilibrium allocations. We show that market completeness allows agents to smooth consumption across states of nature, but not across time; as a result initial differences in beliefs induce persistent consumption imbalances that are not grounded in fundamentals. In some cases, these imbalances are not sustainable forever: the debt of one agent would grow unboundedly, and binding borrowing limits are necessary to prevent Ponzi schemes. Finally, we find that if a rational social planner attaches fixed Pareto weights to different individuals, financial autarky might be welfare superior to complete markets. The first best can be restored transferring consumption from the more optimistic agents to the others.
- Subjects
COMPLETE markets; ENDOWMENT effect (Economics); MARKET equilibrium; ECONOMIC equilibrium; CONSUMPTION (Economics); RESOURCE allocation
- Publication
Economic Theory, 2017, Vol 64, Issue 1, p183
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-016-0980-5