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- Title
Strategic market games with a finite horizon and incomplete markets.
- Authors
Giraud, Gaë; Weyers, Sonia
- Abstract
The article studies a strategic market game associated to an intertemporal economy with a finite horizon and incomplete markets. The general equilibrium model with incomplete markets (GEI) neglects the fact that prices should be derived from the interaction of investors. Imperfect competition under certain circumstances may yield subgame-perfect equilibrium allocations that Pareto-dominate the competitive equilibria of the corresponding GEI economy. An allocation is defined to be sequentially strictly individually rational if the expected final utility of every player is strictly above the utility level induced by his initial endowments. In order to provide incentives for players to punish deviators, the equilibrium plan prescribes to shift from one sequence of rewarding Nash equilibria to another one in the event that a player fails to punish. Price manipulation seems to be necessary in order to outperform the competitive equilibria with incomplete markets. For every economy, there is a generic choice of endowments such that there exist full subgame-perfect equilibria that exhibit arbitrage opportunities, provided the horizon of the economy is large and its traders are patient.
- Subjects
ECONOMIC equilibrium; IMPERFECT competition; PARETO optimum; ENDOWMENTS; EXPECTED utility
- Publication
Economic Theory, 2004, Vol 23, Issue 3, p467
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-003-0389-9