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A Mechanism-Design Approach to Speculative Trade

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  • Kfir Eliaz
  • Ran Spiegler

Abstract

When two parties have different prior beliefs about some future event, they can realize gains through speculative trade. Can these gains be realized when the parties' prior beliefs are not common knowledge? We examine a simple example in which two parties having heterogeneous prior beliefs, independently drawn from some distribution, bet on what future action one of them will choose. We define a notion of "constrained interim-efficient" best and ask whether they can be implemented in Bayesian equilibrium by some mechanism. Our main result establishes that as the costs of unilaterally manipulating the bet's outcome become more symmetric across states, implementation becomes easier. In particular, when these costs are equal in both states, implementation is possible for any distribution. Copyright The Econometric Society 2007.

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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2007.00770.x
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Bibliographic Info

Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 75 (2007)
Issue (Month): 3 (05)
Pages: 875-884

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Handle: RePEc:ecm:emetrp:v:75:y:2007:i:3:p:875-884

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References

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  1. Kim-Sau Chung & Jeffrey C. Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Discussion Papers 1372, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Eliaz, Kfir & Spiegler, Ran, 2004. "Contracting with Diversely Naive Agents," CEPR Discussion Papers 4573, C.E.P.R. Discussion Papers.
  3. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  4. Cramton, Peter & Gibbons, Robert & Klemperer, Paul, 1987. "Dissolving a Partnership Efficiently," Econometrica, Econometric Society, vol. 55(3), pages 615-32, May.
  5. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  6. Eliaz, Kfir & Spiegler, Ran, 2005. "Speculative Contracts," CEPR Discussion Papers 5433, C.E.P.R. Discussion Papers.
  7. Muhamet Yildiz, 2007. "Wishful Thinking in Strategic Environments," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 319-344.
  8. Paul Milgrom & Nancy L.Stokey, 1979. "Information, Trade, and Common Knowledge," Discussion Papers 377R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  10. Dubey, Pradeep, 1982. "Price-Quantity Strategic Market Games," Econometrica, Econometric Society, vol. 50(1), pages 111-26, January.
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Citations

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Cited by:
  1. Stefano Galavotti & Nozomu Muto & Daisuke Oyama, 2011. "On efficient partnership dissolution under ex post individual rationality," Economic Theory, Springer, vol. 48(1), pages 87-123, September.
  2. Rajiv Sethi & Muhamet Yildiz, 2009. "Public Disagreement," Economics Working Papers 0089, Institute for Advanced Study, School of Social Science.
  3. Angrisani Marco & Guarino Antonio & Huck Steffen & Larson Nathan C, 2011. "No-Trade in the Laboratory," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-58, April.
  4. Piero Gottardi & Jean Marc Tallon & Paolo Ghirardato, 2009. "Flexible Contracts," Economics Working Papers ECO2009/34, European University Institute.
  5. Eliaz, Kfir & Spiegler, Ran, 2009. "Bargaining over bets," Games and Economic Behavior, Elsevier, vol. 66(1), pages 78-97, May.
  6. Sandroni, Alvaro & Squintani, Francesco, 2013. "Overconfidence and asymmetric information: The case of insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 149-165.
  7. Anja Sautmann, 2011. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment," Working Papers 2011-10, Brown University, Department of Economics.
  8. Mylovanov, Tymofiy & Tröger, Thomas, 2013. "Mechanism Design by an Informed Principal: The Quasi-Linear Private-Values Case," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 437, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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