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A Mechanism-Design Approach to Speculative Trade

  • Kfir Eliaz
  • Rani 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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Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 784828000000000429.

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Date of creation: 21 Nov 2005
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Handle: RePEc:cla:levrem:784828000000000429
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  1. Cramton, Peter & Gibbons, Robert & Klemperer, Paul, 1987. "Dissolving a Partnership Efficiently," Econometrica, Econometric Society, vol. 55(3), pages 615-32, May.
  2. repec:oup:restud:v:73:y:2006:i:3:p:689-714 is not listed on IDEAS
  3. Jeff Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Theory workshop papers 658612000000000064, UCLA Department of Economics.
  4. Pradeep Dubey, 1979. "Price-Quantity Strategic Market Games," Cowles Foundation Discussion Papers 520, Cowles Foundation for Research in Economics, Yale University.
  5. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  6. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  7. Muhamet Yildiz, 2005. "Wishful Thinking in Strategic Environments," NajEcon Working Paper Reviews 666156000000000598,
  8. Kfir Eliaz & Ran Spiegler, 2004. "Contracting with Diversely Naïve Agents," Levine's Bibliography 122247000000000530, UCLA Department of Economics.
  9. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
  10. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  11. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  12. Kfir Eliaz & Rani Spiegler, 2005. "Speculative Contracts," Levine's Bibliography 784828000000000628, UCLA Department of Economics.
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