Safety in Markets: An Impossibility Theorem for Dutch Books

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 di erent 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.