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A Mechanism-Design Approach to Speculative Trade

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  • Kfir Eliaz
  • Rani 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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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 784828000000000429.

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Date of creation: 21 Nov 2005
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Handle: RePEc:cla:levrem:784828000000000429

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  1. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  2. 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.
  3. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 689-714.
  4. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  5. Muhamet Yildiz, 2007. "Wishful Thinking in Strategic Environments," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 319-344.
  6. Peter Cramton & Robert Gibbons & Paul Klemperer, 1987. "Dissolving a Partnership Efficiently," Papers of Peter Cramton 87econ, University of Maryland, Department of Economics - Peter Cramton, revised 09 Jun 1998.
  7. Dubey, Pradeep, 1982. "Price-Quantity Strategic Market Games," Econometrica, Econometric Society, vol. 50(1), pages 111-26, January.
  8. Jeffrey C. Ely & Kim-Sau Chung, 2004. "Foundations of Dominant Strategy Mechanisms," Econometric Society 2004 North American Summer Meetings 169, Econometric Society.
  9. Kfir Eliaz & Rani Spiegler, 2005. "Speculative Contracts," Levine's Bibliography 784828000000000628, UCLA Department of Economics.
  10. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
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Cited by:
  1. Piero Gottardi & Jean Marc Tallon & Paolo Ghirardato, 2009. "Flexible Contracts," Economics Working Papers ECO2009/34, European University Institute.
  2. Eliaz, Kfir & Spiegler, Ran, 2009. "Bargaining over bets," Games and Economic Behavior, Elsevier, vol. 66(1), pages 78-97, May.
  3. Ludwig Ensthaler & Thomas Giebe & Jianpei Li, 2014. "Speculative partnership dissolution with auctions," Review of Economic Design, Springer, vol. 18(2), pages 127-150, June.
  4. 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.
  5. 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.
  6. Anja Sautmann, 2013. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 124-56, August.
  7. Rajiv Sethi & Muhamet Yildiz, 2009. "Public Disagreement," Economics Working Papers 0089, Institute for Advanced Study, School of Social Science.
  8. Marco Angrisani & Antonio Guarino & Steffen Huck & Nathan Larson, 2008. "No-Trade in the Laboratory," WEF Working Papers 0045, ESRC World Economy and Finance Research Programme, Birkbeck, University of London.
  9. 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.

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