A Simple Model of Speculation as a Spontaneous Breaking of Symmetry - The Welfare Analyses and Some Problems in the Decision Making Theory

Abstract

This paper analyzes the effect of speculation on the economic welfare from various welfare criteria, using a simple Edgeworth box within a three-period competitive framework. Here “speculation” is defined as a series of transition processes of each agent’s spontaneous production of private information, the exchange of commodities based on it under the externality (i.e., symmetry breaking) environment, and finally its spillover into public. It is explicitly shown that the complete sharing of produced information under externality environment, if not accompanied by a positive productivity effect of the “right” decision, does not necessarily attain the non-negative economic value especially in terms of ex-ante expected utility. It is also shown that in the ex-ante sense the first theorem of welfare economics could break in the course of information production. Lastly some points about why this could happen are discussed.

Keywords: Speculation, Competitive equilibrium, Shannon’s information, Ex-ante efficiency, Ex-post efficiency

JEL Classification: D50, G10