Common Beliefs and the Existence of Speculative Trade
This paper shows that if rationality is not common knowledge, the no-trade theorem of Milgrom and Stokey (1982) fails to hold. We adopt Monderer and Samet's (1990) notion of common p-belief and show that when traders entertain doubts about the rationality of other traders, and even if these doubts are very small, arbitrarily large volumes of trade as well as rationality may be common p-belief for a large p. Furthermore, rationality and trade may simultaneously be known to arbitrary large (but finite) degree. The underlying intuition of the model is that, in trade situation, every trader may be rational but may believe tht the others are not fully rational. Thus, rational traders trade with each other, believeing that the other trader might be wrong, while they are right.
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References listed on IDEAS
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- Samet, Dov, 1990.
"Ignoring ignorance and agreeing to disagree,"
Journal of Economic Theory,
Elsevier, vol. 52(1), pages 190-207, October.
- D. Samet, 1987. "Ignoring Ignorance and Agreeing to Disagree," Discussion Papers 749, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Zvika Neeman, 1993. "A Note on Approximating Agreeing to Disagree Results with Common p-Beliefs," Discussion Papers 1029, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Monderer, Dov & Samet, Dov, 1989. "Approximating common knowledge with common beliefs," Games and Economic Behavior, Elsevier, vol. 1(2), pages 170-190, June. Full references (including those not matched with items on IDEAS)