Efficient Bilateral Trade with Interdependent Values: The Use of Two-Stage Mechanisms

Takashi Kunimoto and Cuiling Zhang
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Cuiling Zhang: Singapore Management University

No 6-2025, Economics and Statistics Working Papers from Singapore Management University, School of Economics

Abstract: Efficient, voluntary bilateral trades are generally not implementable in an interdependent values environment with two-sided asymmetric information. To obtain more positive results, we consider two-stage mechanisms in which (i) the outcome (e.g., allocation of the goods) is determined first; (ii) the agents partially learn the state via their own outcome-decision payoffs; and (iii) transfers are finally made. We propose the approximate shoot-the-liar (AS) mechanism and identify Assumption 1, under which “approximately” efficient, voluntary trades are implementable. We further illustrate the permissiveness of the assumption, and characterize it in terms of the nature of interdependence in valuation functions – delineating the boundary between when Assumption 1 holds and when it fails. Finally, we characterize the conditions under which “exactly” efficient, voluntary trades can be implemented using two-stage mechanisms.

Keywords: bilateral trade; interdependent values; two-stage mechanisms (search for similar items in EconPapers)
JEL-codes: C72 D78 D82 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2025-01-01
New Economics Papers: this item is included in nep-des, nep-gth, nep-mic and nep-sea
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Working Paper: Efficient Bilateral Trade with Interdependent Values: The Use of Two-Stage Mechanisms (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:smuesw:2025_001

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