| Abstract: |
I study the long-run behavior of a two-agent economy where agents differ in
their beliefs and are endowed with homothetic recursive preferences of the
Duffie-Epstein-Zin type. When preferences are separable, the economy is
dominated in the long run by the agent whose beliefs are relatively more
precise, a result consistent with the market selection hypothesis. However,
recursive preference specifications lead to equilibria in which both agents
survive, or to ones where either agent can dominate the economy with a
strictly positive probability. In this respect, the market selection
hypothesis is not robust to deviations from separability. I derive analytical
conditions for the existence of nondegenerate long-run equilibria, and show
that these equilibria exist for plausible parameterizations when risk aversion
is larger than the inverse of the intertemporal elasticity of substitution,
providing a justification for models that combine belief heterogeneity and
recursive preferences. |