The interplay of interdependence and correlation in bilateral trade

Takashi Kunimoto and Cuiling Zhang
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Cuiling Zhang: School of Economics, Singapore Management University

No 0-0000, Economics and Statistics Working Papers from Singapore Management University, School of Economics

Abstract: Crémer and McLean (1988) show that the seller can extract full surplus almost always by an incentive compatible, individually rational mechanism in a single-unit auction model with a finite type space in which agents' beliefs are correlated and their valuations can be interdependent. We first show that this paradoxically positive result can be extended to a model of bilateral trades. To make it more realistic, we investigate when ex-post efficiency and ex-post budget balance in bilateral trades can also be achieved by an incentive compatible, individually rational mechanism. We identify a necessary condition for the existence of such mechanisms and show that it is also sufficient for a two-type model. We next show that the identified condition is not sufficient in general. Through a series of examples, we show that the imposition of ex post budget balance in a bilateral trade model induces a delicate interaction between interdependent values and correlated beliefs, so that the existence of incentive compatible, individually rational mechanisms becomes a very subtle problem. Finally, focusing on a model with linear valuations, we give the precise sense in which a possibility result under interdependent values is more fragile than that under private values.

Keywords: bilateral trade; interdependence; correlation (search for similar items in EconPapers)
JEL-codes: C72 D78 D82 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2024-03-31
New Economics Papers: this item is included in nep-des, nep-gth, nep-int, nep-mac, nep-mic and nep-sea
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