A mechanism-design approach to speculative trade

Research output: Contribution to journalArticlepeer-review

Abstract

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.

Original languageEnglish
Pages (from-to)875-884
Number of pages10
JournalEconometrica
Volume75
Issue number3
DOIs
StatePublished - May 2007
Externally publishedYes

Keywords

  • Bets
  • Mechanism-design
  • Noncommon priors
  • Partnership dissolution
  • Speculative trade

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