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Efficiency and equilibria in games of optimal derivative design

Horst, Ulrich ; Moreno-Bromberg, Santiago

In: Mathematics and Financial Economics, 2011, vol. 5, no. 4, p. 269-297

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    Title
    • Efficiency and equilibria in games of optimal derivative design
    Author
    • Horst, Ulrich. Institut für Mathematik, Humboldt-Universität zu Berlin, Unter den Linden 6, 10099, Berlin, Germany
    • Moreno-Bromberg, Santiago. Institut für Banking und Finance, Universität Zürich, Plattenstraße 32, 8032, Zurich, Switzerland
    Document Type
    • Postprint
    OAI-PMH Identifier
    • oai:doc.rero.ch:316334
    Summary
    In this paper, optimal derivative design when multiple firms compete for heterogenous customers is studied. Ties in the agents' best responses generate discontinuous payoffs. Efficient tie-breaking rules are considered: In a first step, the model presented by Carlier etal. (Math Financ Econ 1:57-80, 2007) is extended, and results of Page and Monteiro (J Math Econ 39:63-109, 2003, J Econ Theory 134:566-575, 2007, Econ Theory 34:503-524, 2008) are used to prove the existence of (mixed-strategies) Nash equilibria. In a second step, the case of risk minimizing firms is studied. Socially efficient allocations are introduced, and their existence is proved. In particular, the entropic risk measure is considered