Efficient Bilateral Trade

Rodney Garratt and Marek Pycia

No 18188, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Can two parties reach an ex-post Pareto efficient trade agreement? The importance of the question was elucidated by Coase (1960), and Myerson and Satterthwaite (1983) provided a commonly accepted negative answer that such agreement is impossible when the parties are privately informed. We show that this negative answer depends on the assumption of quasi-linear preferences: efficient trade is possible if risk- aversion or wealth effects are sufficiently large or if agents’ utility is not too responsive to private information. Under empirically-grounded specifications of risk aversion and elasticity of trade, two parties can trade efficiently despite substantial asymmetry of information.

Date: 2023-06
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