Three essays on speculation and welfare in dynamic economies

Abstract

This thesis analyses the impact of belief heterogeneity on the individual and aggregate investment choices, draining the attention to welfare effects and policy implications. Using a theoretical structure, I consider economies where trading exclusively arises for speculative purposes: investors hold different opinions about states of the Nature and foresee a welfare gain from placing bets on future states. In production economies, disagreement affects not only the individual but also the aggregate consumption process, that is endogenously determined by the agents' investment strategies. In general, it enhances the macroeconomic volatility produced by the exogenous shocks. However, this effect has a transient nature since the Market Selection Hypothesis (MSH) holds draining inaccurate traders out of the economy. Despite ensuring long-run accuracy of economic outcomes, the MSH may be not fully appealing from the standpoint of a benevolent policy maker, due to the realized losses incurred by less accurate agents. Therefore, I focus on regulatory trading measures aimed at improving the decentralized Pareto optimal result. In particular, I investigate the effect of a linear financial transaction tax (FTT) placed on the agents' speculative trades. The tax is set by a Government with a dual purpose: maximize the social welfare and the amount of fiscal revenues. The overall impact of the FTT depends on both its magnitude and the position of the truth compared to the agents' subjective probabilities. In particular, when the truth lies in the middle of the agents' beliefs and the tax rate is high enough, this measure may undermine the market selection argument, implying the most accurate agent vanishes with positive probability and leading to severe miss-pricing in the long-run.