Econometrica: Jul 2006, Volume 74, Issue 4

If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets

https://doi.org/10.1111/j.1468-0262.2006.00691.x
p. 929-966

Lawrence Blume, David Easley

This paper provides an analysis of the asymptotic properties of Pareto optimal consumption allocations in a stochastic general equilibrium model with heterogeneous consumers. In particular, we investigate the that markets favor traders with more accurate beliefs. We show that in any Pareto‐optimal allocation whether each consumer vanishes or survives is determined entirely by discount factors and beliefs. Whereas equilibrium allocations in economies with complete markets are Pareto optimal, our results characterize the limit behavior of these economies. We show that, all else equal, the market selects for consumers who use Bayesian learning with the truth in the support of their prior and selects among Bayesians according to the size of their parameter space. Finally, we show that in economies with incomplete markets, these conclusions may not hold. With incomplete markets, payoff functions can matter for long‐run survival, and the market selection hypothesis fails.

Log In To View Full Content

Back