Signalling and arbitrage

Tommy Chin-Chiu Tan and Vicente Madrigal

No 85, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Given a competitive signalling game, we study a transformed game which includes the natural enrichment of contractual opportunities in a market. We show that subgame perfect equilibrium outcomes in the new game which satisfy certa in competitive hypotheses induce sequential equilibrium outcomes in the original game which satisfy the Cho-Kreps extended intuitive criterion. Arbitrage opportunities in the transformed game achieve results similar to refinements of sequential equilibria in the original game.

Date: 1986
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