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 fails to hold. We adopt Monderer and Samet's notion of common p-belief and show that when traders entertain doubts about the rationality of other traders, 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. Journal of Economic Theory Classification numbers: C70, D82, D84.