Phenomenon of a “Snag'' in financial markets and its analysis via the cooperative game theory

Ondřej Černík ; Radim Valenčík

Contributions to game theory and management, Tome 9 (2016), pp. 102-117.

Résumé

The paper describes the development of financial markets and changes in the nature of economic growth using the theory of cooperative games. These issues have developed since the early 1950s under the influence of theoretical problems based on the game theory itself and interacting with real problems outside of the game theory (mostly from economics). It turned out that various applications and contexts correspond to numerous possible solutions of standard tasks, e.g. Nash $(S, d)$ bargaining problem. Some of the significant solutions are responded to questions arising in the context of social welfare economic theory, respectively issues are related to the redistribution of wealth between different groups in population and the rationale of such reallocation. We show that under conditions of sufficiently effective financial markets the question of the relationship between efficiency and equality, which is typical of the theory of social welfare, may be replaced by the question of making full utilization of investment opportunities associated with the acquisition, preservation and application of human capital. We define “sufficient efficiency of financial markets” as ability to fully utilize investment opportunities related – to put it simply – to human development, regardless of its initial assets or income position. This is related to the fact that instead of different ways of reasoning for solution $(S, d)$ of the problem we can take advantage of technical solution (based on the equality of marginal returns of investment opportunities, or rather based on sum payments maximization), e.g. the solution used in problem of optimal allocation of water (water allocation problem) (Brink, et al., 2011). The question of compensation payments in relation to solutions based on technical optimum has important interpretation. Sufficiently efficient functioning of financial markets (in the above mentioned sense) assumes also good functioning of such financial market instruments, e.g. human capital contracts associated with the use of transferred prices and mediated utilization of transferred prices. In case of full utilization of those tools, compensation would not be necessary. Above mentioned topics are part of wider research focused on changes in the nature of economic growth. This research is based on the hypothesis that the existing possibilities of economic growth have become exhausted and that it is necessary to transition towards the economy based on the dominant role of productive services, i.e. services which have immediate effect on the acquisition, preservation and utilization of human capital (e.g. education, health care etc.)(Friedman, 1957). The development of financial markets in the above direction is prerequisite to economic growth.

Détail

Keywords: Nash bargaining problem, investment opportunities, human capital; financial markets; cooperative games; investment opportunities.

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