1. Discussion of Blume, Cogley, Easley, Sargent, and Tsyrennikov “Welfare, Paternalism and Market Incompleteness” Jonathan A. Parker, July 2013

2. Key ingredients Exchange economy with finite-state Markovian uncertainty: P 0 Endowments: e i Bounded aggregate endowment Identical, time-separable choice functions u satisfying Inada conditions Dogmatic heterogeneous beliefs: P i 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. Nice examples: different belief heterogeneity and true probabilities and different market structures. 1.Variance and trends in consumption 2.Drift in consumption 3.Initial wealth -- Pessimism and patience 4.Complete markets leads to immiseration, so other markets structures can do better 5.Sometimes all agents prefer one market structure and welfare criterion prefers another

6. Results Theorems: 1.Welfare maximized by no betting on sunspots 2.Autarky may dominate complete markets 3.With symmetric possible disagreement and patient enough agents, autarky is preferred to complete markets.

7. 1. What about alternative welfare measures? 1.Bayesian all the way 2.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. 1.Yes, as is. 2.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 A.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 B.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 optimists or (priced) risk-loving optimists

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