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Frontiers of Economics in China

Front Econ Chin    2013, Vol. 8 Issue (1) : 50-63     https://doi.org/10.3868/s060-002-013-0003-7
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An Equilibrium Approach to the Aggregation of Beliefs
Yi Jin1, Jianbo Zhang2()
1. Department of Economics, University of Monash, Caulfield, VIC 3145, Australia; 2. Department of Economics, University of Kansas, Lawrence, KS 66045, USA
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Abstract

This paper presents a new answer to the old question of how to aggregate individual beliefs. We construct a model which allows agents to take arbitrage opportunities against the aggregated belief by making contingent claims against the states, and the aggregator (market maker) regulates the probability of states. When all claims from the agents are mutually covered for every realization of the state, an aggregation of individual beliefs is thus obtained. We prove the existence and uniqueness of the equilibrium aggregation, and also show that the aggregate belief lies in the convex hull of individual beliefs. This model allows us to address some important problems such as how individual agent’s attitude toward risk and wealth endowment affect the outcome of the aggregation process, and whether the aggregate belief satisfies the well-known properties like equal treatment.

Keywords aggregation of beliefs      heterogeneous agents      risk attitudes      market equlibrium     
Corresponding Author(s): Jianbo Zhang,Email:jbzhang@ku.edu   
Issue Date: 05 March 2013
 Cite this article:   
Jianbo Zhang,Yi Jin. An Equilibrium Approach to the Aggregation of Beliefs[J]. Front Econ Chin, 2013, 8(1): 50-63.
 URL:  
http://journal.hep.com.cn/fec/EN/10.3868/s060-002-013-0003-7
http://journal.hep.com.cn/fec/EN/Y2013/V8/I1/50
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