Title

Safety in Markets: An Impossibility Theorem for Dutch Books

Author(s)

David Laibson David Laibson (Harvard University)

Leeat Yariv Leeat Yariv (Caltech)

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.

Creation Date

2007-07

Section URL ID

Paper Number

2007-5

URL

http://lyariv.mycpanel.princeton.edu//papers/DutchBooks.pdf

File Function

Jel

D00

Keyword(s)

Competitive Markets, Safety

Suppress

false

Series

13