Working Paper BETA #2003-04

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Title : Strategic Market Games with a Finite Horizon and Incomplete

Author(s) : Gaël GIRAUD, Sonia WEYERS

Abstract : We study a strategic market game associated to an intertemporal economy with a finite horizon and incomplete markets. We demonstrate that generically, for any finite number of players, every sequentially strictly individually rational and default-free stream of allocations can be approximated by a full subgame-perfect equilibrium. As a consequence, imperfect competition may Pareto-dominate perfect competition when markets are incomplete. Moreover — and this contrasts with the main message conveyed by the market games literature — there exists a large open set of initial endowments for which full subgame-perfect equilibria do not converge to η- efficient allocations when the number of players tends to infinity. Finally, strategic speculative bubbles may survive at full subgame-perfect equilibria.

Key-words : Market Games, Folk Theorem, Incomplete Markets, Bubbles

JEL Classification : C72, D43, D52