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Regulation of trades based on differences in beliefs

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  • Crès, Hervé
  • Tvede, Mich

Abstract

Some trades based on differences in beliefs might cause more harm than good. Should they be restricted? If yes, how? We propose three properties ensuring that regulation does not prevent beneficial trade and is consistent: Unanimity – the regulator should not object to trades with identical beliefs; Merge-Proofness of Autarky – if the regulator does not object to finitely many unrelated trades, all with identical beliefs, then it should not object to the mere juxtaposition of the trades; and Independence of Irrelevant Trade – if the regulator does not object to the juxtaposition of two unrelated trades, then it should not object to any of the two trades standing alone. We show that there is a unique policy having these three properties, namely laissez-faire.

Suggested Citation

  • Crès, Hervé & Tvede, Mich, 2018. "Regulation of trades based on differences in beliefs," European Economic Review, Elsevier, vol. 101(C), pages 133-141.
    • Handle: RePEc:eee:eecrev:v:101:y:2018:i:c:p:133-141
    DOI: 10.1016/j.euroecorev.2017.10.001
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    Cited by:

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    More about this item

    Keywords

    Heterogeneous beliefs; Pareto efficiency; Regulation; Speculative trading;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D69 - Microeconomics - - Welfare Economics - - - Other

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