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A Mechanism-Design Approach to Speculative Trade

Listed author(s):
  • Kfir Eliaz
  • Rani Spiegler

When agents hold non-common priors over an unverifiable state of nature which affects the outcome of their future actions, they have an incentive to bet on the outcome. We pose the following question: what are the limits on the agents' ability to realize gains from speculative bets when their prior belief is private information? We apply a 'mechanism design' approach to this question, in the context of a pair of models: a principal-agent model in which the two parties bet on the agent's future action, and a market model in which traders bet on the future price. We characterize interim-efficient bets in these environments, and their implementability as a function of fundamentals. In general, implementability of interim-efficient bets diminishes as the costs of manipulating the bet's outcome become more uneven across states or agents.

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File URL: http://www.tau.ac.il/~rani/bets.pdf
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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
Handle: RePEc:cla:levrem:784828000000000429
Contact details of provider: Web page: http://www.dklevine.com/

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  1. Milgrom, Paul & Stokey, Nancy, 1982. "Information, trade and common knowledge," Journal of Economic Theory, Elsevier, vol. 26(1), pages 17-27, February.
  2. Cramton, Peter & Gibbons, Robert & Klemperer, Paul, 1987. "Dissolving a Partnership Efficiently," Econometrica, Econometric Society, vol. 55(3), pages 615-632, May.
  3. Kim-Sau Chung & J.C. Ely, 2007. "Foundations of Dominant-Strategy Mechanisms," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 447-476.
  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. Allaz Blaise & Vila Jean-Luc, 1993. "Cournot Competition, Forward Markets and Efficiency," Journal of Economic Theory, Elsevier, vol. 59(1), pages 1-16, February.
  6. Dubey, Pradeep, 1982. "Price-Quantity Strategic Market Games," Econometrica, Econometric Society, vol. 50(1), pages 111-126, January.
  7. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  8. Muhamet Yildiz, 2007. "Wishful Thinking in Strategic Environments," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 319-344.
  9. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-1347, November.
  10. Eliaz, Kfir & Spiegler, Ran, 2005. "Speculative Contracts," CEPR Discussion Papers 5433, C.E.P.R. Discussion Papers.
  11. Blaise Allaz & Jean-Luc Vila, 1993. "Cournot Competition, Forward Markets and Efficiency," Post-Print hal-00511806, HAL.
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