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Efficient Bilateral Trade via Two-Stage Mechanisms under One- Sided Asymmetric Information

Takashi Kunimoto and Cuiling Zhang ()
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Cuiling Zhang: The Institute for Advanced Economic Research, Dongbei University of Finance and Eco- nomics

No 8-2021, Economics and Statistics Working Papers from Singapore Management University, School of Economics

Abstract: This paper considers a bilateral-trade model with one-sided asymmetric information in which one agent (seller) initially owns an indivisible object and is fully informed of its value, while the other agent (buyer) intends to obtain the object whose value is unknown to himself. As Jehiel and Pauzner (2006) show that no mechanisms can generally result in efficient, voluntary bilateral trades, we aim to overturn this impossibility result by employing two-stage mechanisms (Mezzetti (2004)) in which first, the outcome (e.g., allocation of the goods) is determined, then the agents observe their own outcome-decision payoffs, and finally, transfers are made. We show that the generalized two-stage Groves mechanism induces efficient, voluntary bilateral trades. On the contrary, we also show by means of an example that the generalized two-stage Groves mechanism fails to achieve efficient, voluntary trades in a two-sided asymmetric information setup in which both parties have private information and each party’s valuation depends on the other’s information in the same way.

Keywords: bilateral trades; one-sided asymmetric information; two-stage mechanisms (search for similar items in EconPapers)
JEL-codes: C72 D78 D82 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2021-08-01
New Economics Papers: this item is included in nep-des, nep-gth, nep-isf, nep-mic and nep-sea
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