Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/312926 
Year of Publication: 
2025
Series/Report no.: 
Center for Mathematical Economics Working Papers No. 702
Publisher: 
Bielefeld University, Center for Mathematical Economics (IMW), Bielefeld
Abstract: 
Heterogeneous beliefs among market participants can lead to questionable speculative trading that goes beyond any risk-sharing motives. We demonstrate that such unwarranted betting behavior in market equilibrium can be mitigated by introducing nonlinear pricing for ambiguous contracts, without compromising legitimate risk-hedging activities. While Arrow-Debreu equilibria generally fail to achieve belief-neutral efficiency, we establish a modified version of the first welfare theorem in which equilibria with nonlinear prices uphold belief-neutral efficiency. Moreover, we show that belief-neutral efficiency can be ensured by introducing suitable transaction costs for ambiguous financial assets.
Subjects: 
Belief-Neutral Pareto efficiency
Heterogeneous Beliefs
Knightian Uncertainty
Ambiguity
General Equilibrium
JEL: 
D81
C61
G11
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.