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A Mechanism-Design Approach to Speculative Trade

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  • Kfir Eliaz
  • Rani Spiegler

Abstract

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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Suggested Citation

  • Kfir Eliaz & Rani Spiegler, 2005. "A Mechanism-Design Approach to Speculative Trade," Levine's Bibliography 784828000000000429, UCLA Department of Economics.
    • Handle: RePEc:cla:levrem:784828000000000429
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ludwig Ensthaler & Thomas Giebe & Jianpei Li, 2014. "Speculative partnership dissolution with auctions," Review of Economic Design, Springer;Society for Economic Design, vol. 18(2), pages 127-150, June.
    2. Justin Downs, 2021. "Information gathering by overconfident agents," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(3), pages 554-568, August.
    3. Tröger, Thomas & Mylovanov, Timofiy, 2012. "Mechanism design by an informed principal: the quasi-linear private-values case," Working Papers 12-14, University of Mannheim, Department of Economics.
    4. Gottardi, Piero & Tallon, Jean Marc & Ghirardato, Paolo, 2017. "Flexible contracts," Games and Economic Behavior, Elsevier, vol. 103(C), pages 145-167.
    5. Angrisani Marco & Guarino Antonio & Huck Steffen & Larson Nathan C, 2011. "No-Trade in the Laboratory," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-58, April.
    6. Michael Grubb, 2015. "Behavioral Consumers in Industrial Organization: An Overview," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 47(3), pages 247-258, November.
    7. Rajiv Sethi & Muhamet Yildiz, 2012. "Public Disagreement," American Economic Journal: Microeconomics, American Economic Association, vol. 4(3), pages 57-95, August.
    8. Daske, Thomas & March, Christoph, 2024. "Efficient incentives with social preferences," Theoretical Economics, Econometric Society, vol. 19(3), July.
    9. Crawford, Vincent P., 2021. "Efficient mechanisms for level-k bilateral trading," Games and Economic Behavior, Elsevier, vol. 127(C), pages 80-101.
    10. Wenner, Lukas M., 2018. "Do sellers exploit biased beliefs of buyers? An experiment," Games and Economic Behavior, Elsevier, vol. 110(C), pages 194-215.
    11. Kneeland, Terri, 2022. "Mechanism design with level-k types: Theory and an application to bilateral trade," Journal of Economic Theory, Elsevier, vol. 201(C).
    12. Stefano Galavotti & Nozomu Muto & Daisuke Oyama, 2011. "On efficient partnership dissolution under ex post individual rationality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 48(1), pages 87-123, September.
    13. Antler, Yair, 2018. "Multilevel Marketing: Pyramid-Shaped Schemes or Exploitative Scams?," CEPR Discussion Papers 13054, C.E.P.R. Discussion Papers.
    14. Sandroni, Alvaro & Squintani, Francesco, 2013. "Overconfidence and asymmetric information: The case of insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 149-165.
    15. Eliaz, Kfir & Spiegler, Ran, 2009. "Bargaining over bets," Games and Economic Behavior, Elsevier, vol. 66(1), pages 78-97, May.
    16. Chen, Jing & Micali, Silvio, 2015. "Mechanism design with possibilistic beliefs," Journal of Economic Theory, Elsevier, vol. 156(C), pages 77-102.
    17. Kneeland, Terri, 2017. "Mechanism design with level-k types: Theory and an application to bilateral trade," Discussion Papers, Research Unit: Economics of Change SP II 2017-303, WZB Berlin Social Science Center.
    18. Piero Gottardi & Jean-Marc Tallon & Paolo Ghirardato, 2015. "Flexible contracts," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01238046, HAL.
    19. Anja Sautmann, 2011. "Contracts for Agents with Biased Beliefs: Some Theory and an Experiment," Working Papers 2011-10, Brown University, Department of Economics.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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