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A Simple Model of Speculation- The Welfare Analysis and Some Problems in the Decision Making Theory

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  • Aoki, Takaaki

Abstract

This article analyzes the effect of speculation on the economic welfare from various criteria, using a simple Edgeworth box within a three-period Walrasian competition framework. Here “speculation” is defined as a series of transition processes of each agent’s spontaneous production of private information, the exchange of commodities based on it under the externality environment, and finally its spillover into public. The methodology and implications are closely related with the concepts of herd behavior by Banerjee (1992), informational externality by Stein (1987), information sharing by Shapiro (1985), and economic value of speculation by Hirshleifer (1971, 1975, 1977). It is explicitly shown that the complete sharing of produced information under externality environment, if not accompanied by almost sure productivity effect, does not necessarily attain the non-negative economic value especially in terms of ex-ante expected utility. The implication is consistent with Aoki (2005). Lastly some criticisms about why this could happen are discussed.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 12425.

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Date of creation: Apr 2003
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Handle: RePEc:pra:mprapa:12425

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Related research

Keywords: Speculation; Information Sharing; Informational Externality; Herd Behavior;

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  1. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-27, September.
  2. Sah, Raaj Kumar & Stiglitz, Joseph E, 1985. "Human Fallibility and Economic Organization," American Economic Review, American Economic Association, vol. 75(2), pages 292-97, May.
  3. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  4. Harrison, J Michael & Kreps, David M, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, MIT Press, vol. 92(2), pages 323-36, May.
  5. Aoki, Takaaki, 2000. "Models of Equilibrium Pricing with Internalized Powers of Independent Judgment Based on Autonomy," MPRA Paper 12649, University Library of Munich, Germany.
  6. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-74, September.
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