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Heterogeneous Beliefs in a Continuous-Time Model

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  • Chiaki Hara

    (Institute of Economic Research, Kyoto University)

Abstract

In an exchange economy under uncertainty populated by consumers having constant and equal relative risk aversion but heterogeneous probabilistic beliefs, we analyze the nature of the representative consumer's probabilistic belief and discount rates. We prove a formula that implies that the representative consumer's discount rates are raised or lowered by belief heterogeneity depending on whether the constant relative risk aversion is greater or smaller than one. We also show that the representative consumer's discount rates may be a hyperbolic function of time even when the individual consumers' discount rates are equal to one another, as long as their beliefs are heterogeneous.

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File URL: http://www.kier.kyoto-u.ac.jp/DP/DP701.pdf
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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 701.

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Length: 15pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:kyo:wpaper:701

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Keywords: Representative consumer; expected utility; hyperbolic discounting; constant relative risk aversion; Ito's Lemma; Girsanov's Theorem;

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