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Strategic freedom, constraint, and symmetry in one-period markets with cash and credit payment

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  • Eric Smith

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  • Martin Shubik

Abstract

In order to explain in a systematic way why certain combinations of market, financial, and legal structures may be intrinsic to certain capabilities to exchange real goods, we introduce criteria for abstracting the qualitative functions of markets. The criteria involve the number of strategic freedoms the combined institutions, considered as formalized strategic games, present to traders, the constraints they impose, and the symmetry with which those constraints are applied to the traders. We pay particular attention to what is required to make these “strategic market games” well-defined, and to make various solutions computable by the agents within the bounds on information and control they are assumed to have. As an application of these criteria, we present a complete taxonomy of the minimal one-period exchange economies with symmetric information and inside money. A natural hierarchy of market forms is observed to emerge, in which institutionally simpler markets are often found to be more suitable to fewer and less-diversified traders, while the institutionally richer markets only become functional as the size and diversity of their users gets large. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-003-0453-5
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 25 (2005)
Issue (Month): 3 (04)
Pages: 513-551

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Handle: RePEc:spr:joecth:v:25:y:2005:i:3:p:513-551

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Keywords: Strategic market games; Clearinghouses; Credit evaluation; Default.;

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Cited by:
  1. Thomas Quint & Martin Shubik, 2004. "A Consumable Money. An Elementary Discussion of Commodity Money, Fiat Money and Credit: Part I," Cowles Foundation Discussion Papers 1455, Cowles Foundation for Research in Economics, Yale University.
  2. Juergen Huber & Martin Shubik & Shyam Sunder, 2009. "Default Penalty as a Disciplinary and Selection Mechanism in Presence of Multiple Equilibria," Cowles Foundation Discussion Papers 1730, Cowles Foundation for Research in Economics, Yale University.
  3. Eric Smith & Martin Shubik, 2005. "Commodity Money and the Valuation of Trade," Cowles Foundation Discussion Papers 1510, Cowles Foundation for Research in Economics, Yale University.
  4. Martin Shubik & Eric Smith, 2005. "Fiat Money and the Natural Scale of Government," Cowles Foundation Discussion Papers 1509, Cowles Foundation for Research in Economics, Yale University.

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