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Welfare effects of short-sale constraints under heterogeneous beliefs

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  • Hiroyuki Nakata

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Abstract

This paper examines the welfare effects of short-sale constraints in an overlapping generations model of a financial economy with heterogeneous beliefs by focussing on the case of rational beliefs in the sense of Kurz (Econ Theory 4:877–900, 1994 ). To measure the social welfare, we adopt a measure that is based on the ex post social welfare concept in the sense of Hammond (Economica 48:235–250, 1981 ), instead of the standard ex ante criterion, since heterogeneity in beliefs invalidates it. Simulation results indicate the existence of socially optimal short-sale constraints. Copyright Springer-Verlag 2013

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File URL: http://hdl.handle.net/10.1007/s00199-012-0691-5
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 53 (2013)
Issue (Month): 2 (June)
Pages: 283-314

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Handle: RePEc:spr:joecth:v:53:y:2013:i:2:p:283-314

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Related research

Keywords: Ex post social welfare; Heterogeneous beliefs; Rational beliefs; Short-sale constraint; D52; D83; D84; G18;

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References

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  1. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
  2. Eduardo L. Gim�nez, 2001. "Complete and Incomplete Markets with Short-Sale Constraints," Tinbergen Institute Discussion Papers 01-034/1, Tinbergen Institute.
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  16. Kurz, Mordecai, 1994. "On the Structure and Diversity of Rational Beliefs," Economic Theory, Springer, vol. 4(6), pages 877-900, October.
  17. Hiroyuki Nakata, 2007. "A Model of Financial Markets with Endogenously Correlated Rational Beliefs," Economic Theory, Springer, vol. 30(3), pages 431-452, March.
  18. Michael Gallmeyer & Burton Hollifield, 2008. "An Examination of Heterogeneous Beliefs with a Short-Sale Constraint in a Dynamic Economy," Review of Finance, European Finance Association, vol. 12(2), pages 323-364.
  19. Carsten K. Nielsen, 2009. "Optimal economic institutions under rational overconfidence, with applications to the choice of exchange rate regime," International Journal of Economic Theory, The International Society for Economic Theory, vol. 5(4), pages 375-407.
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  21. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
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