Trade with Heterogeneous Beliefs
AbstractThe paper analyzes an economy with asymmetric information in which agents trade in contingent assets. The new feature in the model is that each agent may have any prior belief on the states of nature and thus the posterior belief of an agent maybe any probability distribution that is consistent with his private information. We study two solution concepts: Equilibrium, which assumes rationality and market clearing, and common knowledge equilibrium (CKE) which makes the stronger assumption that rationality, market clearing, and the parameters which de?ne the economy are common knowledge. The two main results characterize the set of equilibrium prices and the set of CKE prices in terms of parameters which specify for each state s and event E the amount of money in the hands of agents who know the event E at the state s. The characterizations that are obtained apply to a broad class of preferences which include all preferences that can be represented by the expectation of a state dependent monotone utility function. One implication of these results is a characterization of the information that is revealed in a CKE.
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Bibliographic InfoPaper provided by The Center for the Study of Rationality, Hebrew University, Jerusalem in its series Discussion Paper Series with number dp462.
Length: 37 pages
Date of creation: Jun 2007
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-10 (All new papers)
- NEP-SOC-2007-11-10 (Social Norms & Social Capital)
- NEP-UPT-2007-11-10 (Utility Models & Prospect Theory)
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