Safety in Markets: An Impossibility Theorem for Dutch Books

David Laibson and Leeat Yariv
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Leeat Yariv: Caltech

Working Papers from Princeton University. Economics Department.

Abstract: We show that competitive markets protect consumers from many forms of exploitation, even when consumers have non-standard preferences. We analyze a competitive dynamic economy in which consumers have arbitrary time-separable preferences and arbitrary beliefs about their own future behavior. Competition among agents eliminates rents and protects vulnerable consumers, who could have been exploited by a monopolist. In fact, in competitive general equilibrium no consumer participates in a trading sequence that strictly reduces her endowment { there are no Dutch Books. The absence of Dutch Books in and of itself does not distinguish standard and non-standard preferences. However, non-standard preferences do generate qualitatively different equilibrium outcomes than standard preferences. We characterize the testable implications of the standard model with a dynamic generalization of the Strong Axiom of Revealed Preferences.

Keywords: Competitive Markets; Safety (search for similar items in EconPapers)
JEL-codes: D00 (search for similar items in EconPapers)
Date: 2007-07
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Downloads: (external link)
http://lyariv.mycpanel.princeton.edu//papers/DutchBooks.pdf

Related works:
Working Paper: Safety in Markets: An Impossibility Theorem for Dutch Books (2007)
Working Paper: Safety in Markets: An Impossibility Theorem for Dutch Books (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2007-5

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