Regulation of trades based on differences in beliefs

Hervé Crès, Mich Tvede

Research output: Contribution to journalArticlepeer-review

Abstract

Some trades based on differences in beliefs might cause more harm than good. Should they be restricted? If yes, how? We propose three properties ensuring that regulation does not prevent beneficial trade and is consistent: Unanimity – the regulator should not object to trades with identical beliefs; Merge-Proofness of Autarky – if the regulator does not object to finitely many unrelated trades, all with identical beliefs, then it should not object to the mere juxtaposition of the trades; and Independence of Irrelevant Trade – if the regulator does not object to the juxtaposition of two unrelated trades, then it should not object to any of the two trades standing alone. We show that there is a unique policy having these three properties, namely laissez-faire.

Original languageEnglish (US)
Pages (from-to)133-141
Number of pages9
JournalEuropean Economic Review
Volume101
DOIs
StatePublished - Jan 2018

Keywords

  • Heterogeneous beliefs
  • Pareto efficiency
  • Regulation
  • Speculative trading

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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