Key ingredients

1. Discussion of Blume, Cogley, Easley, Sargent, and Tsyrennikov“Welfare, Paternalism and Market Incompleteness”

2. Key ingredients • Exchange economy with finite-state Markovian uncertainty: P0 • Endowments: ei Bounded aggregate endowment • Identical, time-separable choice functions u satisfying Inada conditions • Dogmatic heterogeneous beliefs: Pi • Different market structures: • complete markets • bonds only • complete markets with borrowing constraint • complete markets with transaction tax

3. Welfare • Individual objective • Individual welfare • Social welfare

4. Results

5. Results Nice examples: different belief heterogeneity and true probabilities and different market structures. • Variance and trends in consumption • Drift in consumption • Initial wealth -- Pessimism and patience • Complete markets leads to immiseration, so other markets structures can do better • Sometimes all agents prefer one market structure and welfare criterion prefers another

6. Results Theorems: • Welfare maximized by no betting on sunspots • Autarky may dominate complete markets • With symmetric possible disagreement and patient enough agents, autarky is preferred to complete markets.

7. 1. What about alternative welfare measures? • Bayesian all the way • Brunnermeier, Simsek, Xiong(see also Davila (Harvard)) My reading is that the qualitative theoretical points would be similar. But not clear for: 3. Counting anticipatory utility in welfare or • Agents that learn from mistakes in long run

8. 2. Can we use this framework in practice? Two answers. • Yes, as is. • Only by relying on data on beliefs and wellbeing to provide a social scientific basis for normative economics (a critique of all welfare economics also)

9. A quick refresher on theoretical content of revealed preference theory (RPT) • “Theory” is really philosophy • Actual theory (testable content) only for hypothetical choices • In practice: functional form assumptions • Static welfare • Assume choice functions equal welfare functions • Intertemporal welfare • Caplin-Leahy: no RPT way to measure a correct discount rate for intertemporal welfare • Typically all Pareto weight on time-0 choices So we have no scientific basis for intertemporal social welfare functions (yet)

10. Welfare depends on preferences vs. beliefs • Assume choice functions do not maximize welfare • So what do we assume? • E.g. care about the future today? • Beliefs vs. preferences • Identical immiseration possible from preferences or from beliefs • how do we interpret observed immiseration? • does the source even matter? Solution: • Survey measures of beliefs (RP impossible) • Survey measures of happiness • => Social scientific foundation for welfare

11. 3. Caveats to the paper’s lessons • Paper: “Belief diversity is a fact of life” • Can’t disagree • Dogmatic: important for long run – no feedback • Elimination of beliefs is elimination of a person  • But maybe some tiny bit of learning • Preferences: Kogan, Ross, Wang, Westerfield • In frictionless, complete-market exchange economies, it is false in general that traders with inferior forecasts do not survive • E.g. patient optimistsor (priced) risk-loving optimists

12. Idiosyncratic risk taking evolutionarily optimal for population • Robson (see also Brennan and Lo) • Is an equilibrium with immiseration necessarily worse for even this welfare criterion? • Is the paper about financial regulation or welfare state? • human capital inalienable