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Distortions and Efficiency in Production Economies with Heterogeneous Beliefs

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  • Christian Heyerdahl-Larsen
  • Johan Walden

Abstract

We study consumption, savings, and asset prices in economies with disagreement and production, focusing on settings with real effects of disagreement. Aggregate savings may be significantly distorted under disagreement, possibly related to the undersaving puzzle. In the production economy, mispricing mainly manifests itself in idiosyncratic risk, in contrast to the exchange economy, where the risk-free rate and expected return on the market may be distorted. Potential policy implications include the introduction of investment taxes or subsidies. Our results highlight the real effects of disagreement in financial markets, and the differences between economies with and without production.

Suggested Citation

  • Christian Heyerdahl-Larsen & Johan Walden, 2022. "Distortions and Efficiency in Production Economies with Heterogeneous Beliefs," The Review of Financial Studies, Society for Financial Studies, vol. 35(4), pages 1775-1812.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:4:p:1775-1812.
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    References listed on IDEAS

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    Cited by:

    1. Bing Han & David Hirshleifer & Johan Walden, 2023. "Visibility Bias in the Transmission of Consumption Beliefs and Undersaving," Journal of Finance, American Finance Association, vol. 78(3), pages 1647-1704, June.
    2. Eduardo Dávila, 2023. "Optimal Financial Transaction Taxes," Journal of Finance, American Finance Association, vol. 78(1), pages 5-61, February.
    3. D’Acunto, Francesco & Rossi, Alberto G. & Weber, Michael, 2024. "Crowdsourcing peer information to change spending behavior," Journal of Financial Economics, Elsevier, vol. 157(C).

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    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D60 - Microeconomics - - Welfare Economics - - - General

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