Transaction Risk, Derivative Assets, and Equilibrium

2016 ◽  
Vol 06 (01) ◽  
pp. 1650001 ◽  
Author(s):  
H. Henry Cao ◽  
Dongyan Ye
Keyword(s):  
Asymmetric Information ◽  
Social Welfare ◽  
Private Information ◽  
Asset Prices ◽  
Rational Expectations ◽  
State Variables ◽  
Underlying Asset ◽  
Market State

We describe a rational expectations model in which there is not only asymmetric information about payoffs but also asymmetric information about the preference, proportion and precision of private information of investors. We define this payoff-irrelevant risk as transaction risk, which is described by market state variables unrelated to payoffs. When derivative assets are introduced, the prices of the derivative assets can reveal information about transaction risk. Due to the informational role of derivative-asset prices, introducing derivative assets can increase social welfare and the price of the underlying asset even though no investors are trading in these derivative assets.

scholarly journals The dual role of equilibrium price in competitive economies with asymmetric information

2008 ◽  
Vol 53 (178-179) ◽  
pp. 7-43
Author(s):  
Dejan Trifunovic
Keyword(s):  
Asymmetric Information ◽  
Private Information ◽  
Rational Expectations ◽  
Equilibrium Price ◽  
Dual Role ◽  
Walrasian Equilibrium ◽  
Equilibrium Concept ◽  
Rational Expectations Equilibrium ◽  
Relative Scarcity

This paper analyses equilibrium in competitive markets with asymmetrically informed agents. In contrast to Walrasian equilibrium, where equilibrium price is only an indicator of relative scarcity, in the models studied in this paper equilibrium price has two additional roles. It conveys and aggregates the private information of agents in the economy. Each agent infers the private information of other agents by studying the equilibrium price. This implies that agents in this setting have higher cognitive capabilities than Walrasian agents. The equilibrium concept used to describe these additional roles of equilibrium price is called Rational Expectations Equilibrium (REE).

Neutral Bargaining in Financial Over-The-Counter Markets

2019 ◽  
Vol 109 ◽  
pp. 539-544 ◽  
Author(s):  
Jin Yeub Kim
Keyword(s):  
Asymmetric Information ◽  
Private Information ◽  
Asset Prices ◽  
Bargaining Solution ◽  
Asset Valuation ◽  
Over The Counter ◽  
Asset Quality

I study bargaining over prices between two investors in financial over-the-counter markets with asymmetric information. I focus on environments in which an asset owner has private information about both her liquidity state and asset quality, and so a buyer is uncertain about the owner's true motive for selling--whether it is because of a liquidity need or because of a low asset valuation. I apply the concept of neutral bargaining solution to characterize the prices at which the investors trade with each other. I illustrate the implications for asset prices in over-the-counter markets where private information may be prevalent.

scholarly journals Signalling, Information and Consumer Fraud

Games ◽  
2020 ◽  
Vol 11 (3) ◽  
pp. 29
Author(s):  
Silvia Martinez-Gorricho
Keyword(s):  
Asymmetric Information ◽  
Private Information ◽  
Common Knowledge ◽  
Market Price ◽  
High Price ◽  
Pareto Improvement ◽  
The Public ◽  
Quality Product ◽  
Parameter Values

In a two-sided asymmetric information market, the role of the accuracy of consumers’ imperfect and private information on the level of fraud, incidence of fraud and trade under price rigidity is examined. Consumers receive a costless but noisy private signal of quality. The product offered in the market can be of two exogenously given qualities and it is common knowledge that the consumer is not willing to pay a high price for a low quality product. A low quality seller chooses to be either honest (by charging the lower market price) or dishonest (by charging the higher price). We show that equilibria involving fraud exist for all parameter values. Furthermore, for some parameter values, we find that -in equilibrium- a higher precision of consumers’ private information leads to higher levels of fraud and incidence of fraud, reducing consumers’ welfare. We provide conditions for the public revelation of consumers’ private information to be a Pareto improvement.

Do Targets Benefit From Auctions? The Role of Private Information

2012 ◽  
Author(s):  
Carol Anilowski Cain ◽  
Antonio J. Macias ◽  
Juan Manuel Sanchez
Keyword(s):  
Private Information

An Analytical Exposition of the Social Welfare Role of Wealth in Islam

2015 ◽  
Author(s):  
Ahmad Bello Dogarawa ◽  
Suleiman Muhammad Hussain
Keyword(s):  
Social Welfare ◽  
The Social

An Experimental Investigation of Auditors' Liability: Implications for Social Welfare and Exploration of Deviations from Theoretical Predictions

2000 ◽  
Vol 75 (4) ◽  
pp. 429-451 ◽  
Author(s):  
Ronald R. King ◽  
Rachel Schwartz
Keyword(s):  
Experimental Investigation ◽  
Social Welfare ◽  
Strict Liability ◽  
Liability Rule ◽  
Optimal Response ◽  
Legal Regimes ◽  
Theoretical Predictions ◽  
Best Responses

This paper reports the results of an experiment designed to investigate how legal regimes affect social welfare. We investigate four legal regimes, each consisting of a liability rule (strict or negligence) and a damage measure (out-of-pocket or independent-of-investment). The results of the experiment are for the most part consistent with the qualitative predictions of Schwartz's (1997) model; however, subjects' actual choices deviate from the point predictions of the model. We explore whether these deviations arise because: (1) subjects form faulty anticipations of their counterparts' actions and/or (2) subjects do not choose the optimal responses given their anticipations. We find that subjects behave differently under the four regimes in terms of anticipation errors and departures from best responses. For example, subjects playing the role of auditors anticipate investments most accurately under the regime with strict liability combined with out-of-pocket damages, but are least likely to choose the optimal response given their anticipations. This finding implies that noneconomic factors likely play a role in determining subjects' choices.

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