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A Mechanism-Design Approach to Speculative Trade

  • Kfir Eliaz
  • Ran Spiegler

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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File URL: http://hdl.handle.net/10.1111/j.1468-0262.2007.00770.x
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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 75 (2007)
Issue (Month): 3 (05)
Pages: 875-884

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Handle: RePEc:ecm:emetrp:v:75:y:2007:i:3:p:875-884
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  1. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  3. Cramton, Peter & Gibbons, Robert & Klemperer, Paul, 1987. "Dissolving a Partnership Efficiently," Econometrica, Econometric Society, vol. 55(3), pages 615-32, May.
  4. Kfir Eliaz & Ran Spiegler, 2006. "Contracting with Diversely Naive Agents," Review of Economic Studies, Oxford University Press, vol. 73(3), pages 689-714.
  5. Kfir Eliaz & Rani Spiegler, 2005. "Speculative Contracts," Levine's Bibliography 784828000000000628, UCLA Department of Economics.
  6. Dubey, Pradeep, 1982. "Price-Quantity Strategic Market Games," Econometrica, Econometric Society, vol. 50(1), pages 111-26, January.
  7. Muhamet Yildiz, 2005. "Wishful Thinking in Strategic Environments," NajEcon Working Paper Reviews 666156000000000598, www.najecon.org.
  8. Jeff Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Theory workshop papers 658612000000000064, UCLA Department of Economics.
  9. 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.
  10. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
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