Regulating externalities is particularly challenging in the presence of uncertainty and disagreement among economic agents. Traditional Pigouvian and Coasean approaches often fail because they require either precise knowledge of externality costs or frictionless bargaining. We propose an “uncertainty-based regulation” (UBR) mechanism that harnesses heterogeneous information and disagreement among firms to achieve socially efficient outcomes without requiring explicit information revelation. UBR modifies firms’ payoffs based on their deviation from the aggregate action, weighted by observable outcomes, effectively creating a synthetic market that internalizes externalities. This mechanism implicitly defines property rights, aligns incentives, and elicits private information without direct negotiation. We show that UBR achieves team efficiency, dominates conventional regulation, incentivizes information acquisition, and remains robust even when firms distrust each others’ signals. Moreover, if brought to a vote, it would receive unanimous support, making it politically viable.

Are belief dynamics or risks and risk attitudes more important for asset pricing? Allowing both, I use survey data combined with subjective-belief versions of stochastic discount factor (SDF) volatility bounds to shed new light on this classic question. I estimate lower bounds for the volatility of the SDF attributable to (i) risks relevant for investor marginal utility, versus (ii) subjective belief dynamics. The estimates suggest that risks, particularly long-term risks, make up at least 50% of SDF volatility, with many estimates much higher than 50%. An example extrapolation model with a modest direct contribution of beliefs to SDF volatility (about 25%) can account for my estimates. This example also highlights the potential for a novel mechanism, subjective risk, which is the indirect impact beliefs have on asset prices through induced marginal utility volatility.

We construct a novel composite indicator of inflation uncertainty (CIU) from two components: a news-based measure derived from textual analysis of newspaper articles and a market-based measure that draws on bond ETF option prices and commodity price volatility. Unlike survey or inflation option-based measures, our index is available in real time and extends back to 1926. CIU reveals that inflation uncertainty spiked during the Great Depression, World War II, the 1970s and 1980s, following the Global Financial Crisis, and in the post-pandemic period. Higher inflation uncertainty is associated with higher costs of capital for firms and declines in private investment activity.