A Mechanism-Design Approach to Speculative Trade

Ran Spiegler () and Kfir Eliaz

No 5434, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Speculative trade; Non-common priors; Mechanism design; Partnership dissolution (search for similar items in EconPapers)
JEL-codes: D82 D84 L13 (search for similar items in EconPapers)
Date: 2005-12
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Related works:
Journal Article: A Mechanism-Design Approach to Speculative Trade (2007)
Working Paper: A Mechanism-Design Approach to Speculative Trade (2005)
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