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Heterogeneity and learning with complete markets

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  • Sergio Santoro

    (Bank of Italy)

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.

Suggested Citation

  • Sergio Santoro, 2017. "Heterogeneity and learning with complete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(1), pages 183-211, June.
    • Handle: RePEc:spr:joecth:v:64:y:2017:i:1:d:10.1007_s00199-016-0980-5
    DOI: 10.1007/s00199-016-0980-5
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    Cited by:

    1. Bonam, Dennis & Goy, Gavin, 2019. "Home biased expectations and macroeconomic imbalances in a monetary union," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 25-42.

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    More about this item

    Keywords

    Heterogeneous beliefs; Learning; Arrow securities; Borrowing limits;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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