Belief aggregation for representative agent models

Abstract

Representative 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.