efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

speculation under unawareness no trade theorems establish that in various trading environments investors who share a common prior will not engage in speculation as long as expected utility bayesian updating and full awareness are imposed we relax the last assumption by allowing for asymmetric unawareness and examine under which conditions speculative behaviour emerges we find that if common knowledge is assumed as in the settings of aumann 1976 and milgrom and stokey 1982 unawareness cannot generate speculation this is not true however in settings where no common knowledge is assumed such as speculation in equilibrium geanakoplos 1989 and betting that is always beneficial morris 1994 unless stronger conditions on awareness are imposed

what do twins share a joint probit estimation of banking and currency crises we study the determinants of twin crises and investigate the direction of causality between banking and currency crises in emerging markets we model banking and currency crises as dynamic events correlated over time and jointly estimate their probability using panel data simulation techniques we show that banking and currency crises are closely intertwined and are driven by common fundamentals banking crises exhibit strong state dependence suggesting that countries that have experienced a banking crisis in the past are more prone to experience another crisis finally we find evidence of unobserved heterogeneity and autocorrelation in the error term structure

financial intermediation as a beliefs bridge between optimists and pessimists this paper proposes a new framework for understandingnancial intermediation in contrast to previous research we consider a setting in which intermediaries possess no inherent information processing or monitoring advantages instead in an economy with overly optimistic entrepreneurs who require funding from overly skeptical pessimistic investors we show that intermediaries can arise endogenously in such a setting only a rational intermediary will be su ciently optimistic tond it worthwhile to invest in a technology for screening entrepreneurs projects and yet be pessimistic enough to use this technology our framework produces implications consistent with heretofore unexplained stylized facts and a number of others which are as of yet untested

speculative currency attacks with endogenously induced commercial bank crises abstract to date all models of exchange rate crises ignore the existence of a commercial banking sector however if deposit money internal drain is used to purchase foreign exchange external drain then an external drain may give rise to a banking crisis the paper illustrates how an internal drain alters the dynamics of a speculative attack when it results in a cash payments restriction by interrupting the external drain such a restriction postpones devaluation and reduces the size of the initial devaluation the us internal and external drains of 1893 are discussed to provide motivation and support for the model

a welfare criterion for models with distorted beliefs this paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs instead of taking a stand on whose belief is correct our criterion asserts an allocation to be belief neutral ine cient if it is ine cient under any convex combination of agents beliefs while this criterion gives an incomplete ranking of social allocations it can identify negative sum speculation in a broad range of prominent models with distorted beliefs

disagreement and learning dynamic patterns of trade we study volume dynamics when there are disagreements among investors for that purpose we develop a dynamic model in which differences in the interpretation of public information lead to trade we obtain a simple linear equilibrium in closed form in which risk averse agents take into account future trading opportunities when solving for their optimal portfolio allocation using this framework we then study what restrictions on the disagreement process are needed to generate empirically observed patterns in volume and prices we show that having infrequent but major disagreements leads to autocorrelation in volume and correlation between volume and absolute price changes when agents disagree on past news but agree on the interpretation of current news there is learning and the convergence of agents opinions leads to trade

domestic bank runs and speculative attacks on foreign currencies abstract the paper extends the international transmission of financial crisis literature by illustrating how a domestic bank run can cause a speculative attack on foreign currencies the idea is that when domestic banks invest abroad a domestic bank run will give way to a repatriation of foreign capital if the repatriation causes a depletion of the foreign central bank s foreign exchange reserves then the foreign currency will be devalued as such a devaluation will render domestic banks insolvent in the rational equilibrium domestic bank runs will 1 cause a speculative attack on the foreign currency and 2 be self justified

public provision of sales contingent claims backed finance to smes a policy alternative abstract in europe and elsewhere governments intervene to stimulate innovation in the sme sector and because smes face financial constraints in particular governments encourage the provision of debt and equity venture capital finance to such firms this paper discusses sales contingent claim scc backed finance funding secured only on a claim written on sales that offers a different repayment profile to debt and equity the attractiveness of such finance to firms as well as the behaviour of firms financed in this way are analysed for various reasons scc backed financial instruments are generally not available to smes on the market but it is argued that wider availability could further stimulate the growth and innovative activity of smes the correction of this market incompleteness by the introduction of government schemes providing scc backed corporate finance for smes in higher risk higher tech sectors is recommended the workability of such a scheme is explored by looking at existing examples aimed largely at project finance for larger firms

trade with heterogeneous prior beliefs and asymmetric information no trade theorems have shown that new information will not lead to trade when agents share the same prior beliefs this paper explores the structure of no trade theorems with heterogeneous prior beliefs it is shown how different notions of efficiency under asymmetric information ex ante interim ex post are related to agents prior beliefs as well as incentive compatible and public versions of those efficiency concepts these efficiency results are used to characterize necessary and sufficient conditions on agents beliefs for no trade theorems in different trading environments

interim efficient allocations under uncertainty abstract this paper considers an exchange economy under uncertainty with asymmetric information uncertainty is represented by multiple priors and posteriors of agents who have either bewley s incomplete preferences or gilboa schmeidler s maximin expected utility preferences the main results characterize interim efficient allocations under uncertainty that is they provide conditions on the sets of posteriors thus implicitly on the way how agents update the sets of priors for non existence of a trade which makes all agents better off at any realization of private information for agents with the incomplete preferences the condition is necessary and sufficient but for agents with the maximin expected utility preferences the condition is sufficient only a couple of necessary conditions for the latter case are provided

financial crises and balance of payments crises a simple model of the southern cone experience abstract this paper starts from a simple model of the domestic banking sector and develops the potentially destabilizing macroeconomic consequences of its role in intermediating foreign capital inflows both financial and balance of payments crises may result reminiscent of the southern cone experience

asset prices and trading volume in a beauty contest speculators buy an asset hoping to sell it later to investors with higher private valuations if agents are uncertain about the distribution of private valuations and about the beliefs of others about this distribution a beauty contest with an infinite hierarchy of beliefs arises under harsanyi s assumption of a common prior the infinite beliefs hierarchy is readily solved using bayes law this paper shows that common knowledge of the beliefs formation rule mapping the private valuation of each agent into his first order belief also simplifies the beliefs hierarchy while allowing for disagreement among agents we analyse the resulting speculation in a stylized asset market several statistics computed only from readily observable quote return and volume data are evaluated in terms of their power to discriminate between genuine disagreement and the harsanyian case only statistics that relate volume and volatility or volume and changes in best offers have the necessary discriminatory power

asymptotic efficiency in large exchange economies with asymmetric information the authors provide conditions on an exchange economy with asymmetric information that guarantee that when the economy is replicated sufficiently often there will be an allocation that is incentive compatible individually rational and nearly efficient the main theorem covers both the case in which aggregate uncertainty remains when the economy is replicated and the case in which replication eliminates aggregate uncertainty in addition the authors demonstrate how their theorem does or does not apply to standard asymmetric information problems such as the buyer s bid double auction problem akerlof s lemons problem and insurance with asymmetric information copyright 1992 by the econometric society

central bank reactions to banking crises in fixed exchange rate regimes abstract until recently speculative attacks and banking crises have been largely treated as separate phenomena however the recent experiences of several southern cone countries indicates that banking difficulties can lead to a currency crises if in combatting them the central bank adopts policies which are inconsistent with the fixed exchange rate regime the paper illustrates how this can be the case and discusses what are the policy responses available to central banks that face banking crises in fixed exchange rate regimes

sustained development of a society with a renewable resource abstract a maximin program is applied to a policy of sustaining a simple society whose population is dependent on a resource subject to logistic growth regular and non regular paths are characterized there are continua of both regular and non regular solutions the type depending on the initial conditions a non regular path involves an intermediate part in which the sustainment constraint is not effective all solutions are time consistent and pareto optimal because a problem may not be regular it is not valid to assume that sustainment implies constant utility

on the duality between prior beliefs and trading demands in an abstract model with asymmetric information we show that there is a duality relationship between the prior beliefs and trading demands of bets for any given individual then we aggregate all the agents to obtain a second duality relationship between common prior beliefs and trading possibilities we easily derive from these relationships the no trade theorem and its converse general efficiency results can be obtained moreover our framework is sufficiently general to cover special cases proved previously for example econometrica 62 1994 1327 discussion paper 83 center for rationality and interactive decision theory the hebrew university of jerusalem 1995 j econom theory 91 2000 127 gameseconom behav 24 1998 172 yet our argumentsare both simple and intuitive r 2003 published by elsevier science usa

interim efficiency with meu preferences abstract recently kajii and ui 2009 17 proposed to characterize interim efficient allocations in an exchange economy under asymmetric information when uncertainty is represented by multiple posteriors when agents have bewley s incomplete preferences kajii and ui 2009 17 proposed a necessary and sufficient condition on the set of posteriors however when agents have gilboa schmeidler s maxmin expected utility preferences they only propose a sufficient condition the objective of this paper is to complete kajii and ui s work by proposing a necessary and sufficient condition for interim efficiency for various models of ambiguity aversion and in particular maxmin expected utility our proof is based on a direct application of some results proposed by rigotti shannon and stralecki 2008 24

axiomatic characterizations of rational choice in strategic environments for more than forty years economists have wrestled with the elusive notion of rational behavior in strategic environments generating a variety of competing approaches even for simple simultaneous move games four distinct solution concepts including the notions of nash equilibria correlated equilibria rationalizability and iterated dominance currently have some standing as theories of strategic rationality here i propose four axioms for rational choice in strategic environments and use these to characterize the sets of pure strategies that players may select under each of the solution concepts mentioned above my results underscore both the similarities and differences between the four concepts

sufficient and necessary conditions for information to have social value in pure exchange this paper extends corrects and unifies earlier statements concerning the social value of public information as well as the no trading conditions in pure exchange sufficient and necessary conditions are provided for both the single period and two period cases in a postsignal trading model the social value of information is shown to be closely linked to the allocational efficiency of the market the degree of homogeneity of prior beliefs and of information structures the time additivity of preferences and the efficiency of endowments we conclude that the case in favor of public information is much stronger than previously suggested

the timing and size of bank financed speculative attacks abstract the recent epidemic of banking and currency crises has led researchers to consider the role that unhealthy banks may have in currency crises the present paper in contrast investigates the anatomy of a currency crisis when banks are healthy enough to finance it it is shown that when banks finance the crisis an anticipated collapse occurs sooner and an unanticipated collapse is worse than when banks do not increase credit during the crisis the findings imply that restrictions on bank loan activities and careful management of bank balance sheet risks may lessen the severity of or even prevent a currency crisis

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

borrowing to defend the exchange rate and the timing and magnitude of speculative attacks abstract the paper analyses the implications for the timing and magnitude of a speculative attack on a fixed exchange rate of government borrowing to increase the stock of international reserves it is shown that such borrowing reduces the likelihood of an early collapse and increases the likelihood of an eventual collapse the magnitude of the speculative attack also increases

the exact timing of the collapse of an exchange rate regime and its impact on the relative price of traded goods as of february 28 1983 ninety four countries are classified as having a fixed exchange rate regime 38 are pegged to the u s dollar 13 to the french franc 14 to the special drawing right and 24 to different baskets of currencies the choice of a fixed exchange rate peg implies a specific monetary discipline namely monetary growth equal to the growth rate of the currency or currencies to which a country is pegged monetary policy is thus subject to an exchange rate rule rather than to either a monetary growth rule or alternatively to discretionary policy a fixed exchange rate is a specific case of an active crawling peg where the preannounced rate of change in the exchange rate is zero active crawling peg rules whereby the exchange rate is adjusted downward by a preannounced amount over a specified period of time have been practiced in various places particularly in latin america recent experiments include argentina beginning december 1978 brazil during the 1980 calendar year chile from february 1978 to june 1979 jamaica from may 1978 to may 1979 portugal from august 1977 to june 1979 and uruguay beginning october 1978 1 at times the prean

bank runs and currency peg credibility abstract it is shown that as a currency peg constrains a government s ability to finance a bailout bank runs are more likely in credible fixed exchange rate regimes than in those in which the central bank is less committed to its exchange rate within the context of the model and given the government responses to their respective banking crises during the period 1994 1995 the bank runs in argentina and lack thereof in mexico seem to be rational responses of depositors

the veil of public ignorance abstract a theory of cooperative choice under incomplete information is developed in which agents possess private information at the time of contracting and have agreed on a utilitarian standard of evaluation governing choices under complete information the task is to extend this standard to situations of incomplete information our first main result generalizes harsanyi s j polit econ 63 1955 309 classical result to situations of incomplete information assuming that group preferences satisfy bayesian coherence and interim pareto dominance these axioms are mutually compatible if and only if a common prior exists we argue that this result partly resolves the impossibility of bayesian preference aggregation under complete information

common beliefs and the existence of speculative trade abstract this paper shows that if rationality is not common knowledge the no trade theorem of milgrom and stokey fails to hold we adopt monderer and samet s notion of common p belief and show that when traders entertain doubts about the rationality of other traders arbitrarily large volumes of trade as well as rationality may be common p belief for a large p furthermore rationality and trade may simultaneously be known to arbitrary large but finite degree journal of economic theory classification numbers c70 d82 d84