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A Simple Model of Privately Profitable But Socially Useless Speculation

Author

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  • Murray C. Kemp
  • Hans-Werner Sinn

Abstract

The paper presents a general equilibrium model of a pure exchange economy with stochastic endowments, in which speculation in the forward market is profitable and stabilizes prices but is useless from a welfare point of view. Reconciling the Siegel paradox with the theory of incomplete markets, we show that banning speculation by closing the forward market may increase social welfare. We also show that the addition of a market might reduce the gains from international trade for all participating countries. JEL Classification Numbers: F10, F11, F19.
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Suggested Citation

  • Murray C. Kemp & Hans-Werner Sinn, 2000. "A Simple Model of Privately Profitable But Socially Useless Speculation," The Japanese Economic Review, Japanese Economic Association, vol. 51(1), pages 84-94, March.
  • Handle: RePEc:bla:jecrev:v:51:y:2000:i:1:p:84-94
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    File URL: http://hdl.handle.net/10.1111/1468-5876.00140
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    Cited by:

    1. Cassing, James H. & Long, Ngo Van, 2021. "Trade in trash: A political economy approach," European Journal of Political Economy, Elsevier, vol. 67(C).
    2. Edlin Aaron S., 2002. "Forward Discount Bias, Nalebuff's Envelope Puzzle, and the Siegel Paradox in Foreign Exchange," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 2(1), pages 1-11, September.
    3. Edlin, Aaron S., 2002. "Forward Discount Bias, Nalebuff's Envelope Puzzle, and the Siegel Paradox in Foreign Exchange," Berkeley Olin Program in Law & Economics, Working Paper Series qt2wc1p9pw, Berkeley Olin Program in Law & Economics.
    4. Marielle de Jong, 2011. "An adequate measure for exchange rate returns," Journal of Asset Management, Palgrave Macmillan, vol. 12(2), pages 85-93, June.
    5. Lars Hornuf & Lars Klöhn, 2019. "Do judges hate speculators?," European Journal of Law and Economics, Springer, vol. 47(2), pages 147-169, April.

    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F19 - International Economics - - Trade - - - Other

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