Belief heterogeneity can render ex ante Pareto optimality a poor measure of welfare since under such diversity, Pareto optimal policies may lead to clearly inferior ex post outcomes. Under heterogeneous beliefs, properly defined ex post optimal policies would then dominate ex ante optimal policies. Climate policy is a dramatic example but for a deeper study of the problem we present a generic example to show that the problem is widespread and the difference between ex ante and ex post welfare measures can be large. We explore, via simulations, two general classes of problems where the differences of the measures are significant: credit constraints and commonly used welfare measures such as total output and its volatility. The model of diverse beliefs we use offers a natural definition of ex post optimality and we show that credit constraints constitute an ex post welfare improving policy while the use of output and its volatility as a welfare measure often leads to outcomes that are dominated by the ex post optimal policy.
|Number of pages||36|
|Publication status||Published - 2020|
- Market Volatility
- Heterogeneous Beliefs
- Social Welfare