Trade with Heterogeneous Multiple Priors

Abstract

This paper presents a general framework to understand the possibility of a purely speculative trade under asymmetric information, where the decision making rule of each trader conforms to the multiple priors model (Gilboa - Schmeidler (1989)): the agents are interested in the minimum of the conditional expected value of trade where the minimum is taken over the set of posteriors. In this framework, we derive a necessary and sufficient condition on the sets of posteriors, thus implicitly on the updating rules adopted by the agents, for non-existence of trade such that it is always common knowledge that every agent expects a positive gain.

Keywords: multiple priors, no trade, dynamic consistency, interim efficiency, rectangularity

JEL Classification: C70, D81, D82, D84