Modeling of Boom and Burst of Shadow - A Game Theory Approach

This paper formulates a game theory model to discuss equilibrium among four main participants who need to choose between acting sunshine and shadow activities in financial market. Their activities will determine the market´s transparency level and indirectly decide utility of each player. We observe that the perfect situation, when all players act sunshine activities, is Nash equilibrium. But when financial institutions, regulators and intermediaries choose to coalesce together and deviate from the rules, a Pareto improvement will take place in the allied group, and the equilibrium will move. But when market transparency decreases to too low a level and goes below the bottom line, investors will leave the market and the bubble will burst.