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Disagreement, Financial Markets, and the Real Economy
| Content Provider | Semantic Scholar |
|---|---|
| Author | Baker, Steven D. |
| Copyright Year | 2011 |
| Abstract | I study consumption, asset prices, and portfolios in a production economy with two agents who disagree regarding firm productivity. The economy is characterized by continual overconsumption by individuals, and periodic “consumption booms” at the aggregate level. An optimistic investor believes stocks offer high excess returns, whereas a pessimist perceives low or negative excess returns. Each investor is able to construct a portfolio that seems to offer higher returns than he could achieve without the presence of his “misinformed” counterpart. As a result, each believes that his portfolio can support a higher level of consumption. When the wealth distribution tilts toward the optimist, aggregate consumption rises to a level not seen in either agent’s homogeneous economy: a consumption boom. In a multi-sector version of the economy, controversy regarding one small firm is sufficient to cause significant movements in the price of a larger firm. ∗Thanks to Burton Hollifield and Emilio Osambela for numerous helpful discussions, and to Carnegie Mellon macroeconomics workshop participants for comments. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | https://faculty.comm.virginia.edu/sdb7e/papers/baker_disagreementRealEcon.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
