Suppose all investors have CARA utility. Consider an allocation w h = ah +bhw m where bh
Question:
Suppose all investors have CARA utility. Consider an allocation w˜ h = ah +bhw˜ m where bh = τh/τ and H h=1 ah = 0. Show that the allocation is Pareto optimal.
Hint: Show that it solves the social planner’s problem with weights λh defined as
λh = τheah/τh .
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