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A Mechanism-Design Approach to Speculative Trade

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Author Info
Eliaz, Kfir
Spiegler, Ran

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Abstract

When agents hold non-common priors over an unverifiable state of nature which affects the outcome of their future actions, they have an incentive to bet on the outcome. We pose the following question: what are the limits on the agents' ability to realize gains from speculative bets when their prior belief is private information? We apply a 'mechanism design' approach to this question, in the context of a pair of models: a principal-agent model in which the two parties bet on the agent's future action, and a market model in which traders bet on the future price. We characterize interim-efficient bets in these environments, and their implementability as a function of fundamentals. In general, implementability of interim-efficient bets diminishes as the costs of manipulating the bet's outcome become more uneven across states or agents.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5434.

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Date of creation: Dec 2005
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Handle: RePEc:cpr:ceprdp:5434

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Related research
Keywords: mechanism design; non-common priors; partnership dissolution; speculative trade;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. [Downloadable!] (restricted)
  2. Kfir Eliaz & Ran Spiegler, 2004. "Contracting with Diversely Naïve Agents," Levine's Bibliography 122247000000000530, UCLA Department of Economics. [Downloadable!]
    Other versions:
  3. Dubey, Pradeep, 1982. "Price-Quantity Strategic Market Games," Econometrica, Econometric Society, vol. 50(1), pages 111-26, January. [Downloadable!] (restricted)
  4. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April. [Downloadable!] (restricted)
    Other versions:
  5. Muhamet Yildiz, 2005. "Wishful Thinking in Strategic Environments," NajEcon Working Paper Reviews 666156000000000598, www.najecon.org. [Downloadable!]
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  6. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February. [Downloadable!] (restricted)
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  7. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November. [Downloadable!] (restricted)
  8. Kfir Eliaz & Rani Spiegler, 2005. "Speculative Contracts," Levine's Bibliography 784828000000000628, UCLA Department of Economics. [Downloadable!]
    Other versions:
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Marco Angrisani & Antonio Guarino & Steffen Huck & Nathan Larson, 2008. "No-Trade in the Laboratory," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
    • 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. [Downloadable!]
  2. Rajiv Sethi & Muhamet Yildiz, 2009. "Public Disagreement," Economics Working Papers 0089, Institute for Advanced Study, School of Social Science. [Downloadable!]
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