Belief aggregation for representative agent models

Abstract

AbstractRepresentative agent models pin down equilibrium asset prices of an underlying heterogeneous agents economy through the utility maximization problem of a representative agent evaluated at aggregate endowment levels. This paper considers a complete markets asset exchange economy in which all economic agents are expected utility maximizers who share the same risk preferences but may have heterogeneous endowments and beliefs. For arbitrary well‐behaved Bernoulli utility functions we derive belief aggregation formulas that characterize the beliefs of an expected utility maximizing representative agent.