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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. Peter Cramton & Robert Gibbons & Paul Klemperer, 1985. "Dissolving a Partnership Efficiently," Working papers 406, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. 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.
  3. 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.
  4. Eliaz, Kfir & Spiegler, Ran, 2004. "Contracting with Diversely Naive Agents," CEPR Discussion Papers 4573, C.E.P.R. Discussion Papers.
  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. Pradeep Dubey, 1979. "Price-Quantity Strategic Market Games," Cowles Foundation Discussion Papers 520, Cowles Foundation for Research in Economics, Yale University.
  7. Muhamet Yildiz, 2007. "Wishful Thinking in Strategic Environments," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 319-344.
  8. Jeffrey C. Ely & Kim-Sau Chung, 2004. "Foundations of Dominant Strategy Mechanisms," Econometric Society 2004 North American Summer Meetings 169, Econometric Society.
  9. Morris, Stephen, 1994. "Trade with Heterogeneous Prior Beliefs and Asymmetric Information," Econometrica, Econometric Society, vol. 62(6), pages 1327-47, November.
  10. Eliaz, Kfir & Spiegler, Ran, 2005. "Speculative Contracts," CEPR Discussion Papers 5433, C.E.P.R. Discussion Papers.
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