Safety in Markets: An Impossibility Theorem for Dutch Books
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Laibson, David I., and Yeeat Yariv. 2007. "Safety in Markets: An Impossibility Theorem for Dutch Books." Working Paper, Department of Economics, Harvard University.Abstract
We show that competitive markets protect consumers from many forms of exploitation, even when consumers have non-standard preferences. We analyze a competitive dynamic economy in which consumers have arbitrary time-separable preferences and arbitrary beliefs about their own future behavior. Competition among agents eliminates rents and protects vulnerable consumers, who could have been exploited by a monopolist. In fact, in competitive general equilibrium no consumer participates in a trading sequence that strictly reduces her endowment - there are no Dutch Books. The absence of Dutch Books in and of itself does not distinguish standard and non-standard preferences. However, non-standard preferences do generate qualitatively different equilibrium outcomes than standard preferences. We characterize the testable implications of the standard model with a dynamic generalization of the Strong Axiom of Revealed Preferences.Other Sources
http://scholar.harvard.edu/files/laibson/files/safety_in_markets_an_impossibility_theorem_for_dutch_books.pdfhttp://people.hss.caltech.edu/~lyariv/papers/DutchBooks.pdf
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