CFDP 1420

Strategic Freedom, Constraint and Symmetry in One-period Markets with Cash and Credit Payment

Author(s): 

Publication Date: May 2003

Pages: 26

Abstract: 

In order to explain in a systematic way why certain combinations of market, financial, and legal structures may be intrinsic to certain capabilities to exchange real goods, we introduce criteria for abstracting the qualitative functions of markets. The criteria involve the number of strategic freedoms the combined institutions, considered as formalized strategic games, present to traders, the constraints they impose, and the symmetry with which those constraints are applied to the traders. We pay particular attention to what is required to make these “strategic market games” well-defined, and to make various solutions computable by the agents within the bounds on information and control they are assumed to have. As an application of these criteria, we present a complete taxonomy of the minimal one-period exchange economies with symmetric information and inside money. A natural hierarchy of market forms is observed to emerge, in which institutionally simpler markets are often found to be more suitable to fewer and less-diversified traders, while the institutionally richer markets only become functional as the size and diversity of their users gets large.

Keywords: 

Strategic market games, Clearinghouses, Credit evaluation, Default

JEL Classification Codes:  C7, G10, G20, L10, D40, D50

Note: 

Published in Economic Theory (April 2005), 25(3): 513-551 [DOI]