Heterogeneity, Selection, and Wealth Dynamics (original) (raw)

The market selection hypothesis states that, among expected utility maximizers, competitive markets select for agents with correct beliefs. In some economies this holds, while in others it fails. It holds in complete market economies with a common discount factor and bounded aggregate consumption. It can fail when markets are incomplete, when consumption grows too quickly, or when discount factors and beliefs are correlated. These insights have implication for the analysis of the heterogeneous agent stochastic dynamic general equilibrium models common in finance and macroeconomics.