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Bilateral trading with naive traders

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  • Saran, Rene
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    Abstract

    We introduce naive traders in bilateral trading. These traders report their true types in direct mechanisms and bid/ask their values/costs in auctions. We show that by expropriating naive traders in direct mechanisms, the mechanism designer can subsidize additional trades by strategic traders and improve efficiency. In fact, complete expropriation of naive traders is a necessary condition for constrained efficiency. A significant implication is that in the presence of naive traders, ex-post individually rational mechanisms are not constrained efficient. In contrast, if the traders must use a given mechanism, then the introduction of naive traders has an ambiguous effect on efficiency.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0899825610001491
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    Bibliographic Info

    Article provided by Elsevier in its journal Games and Economic Behavior.

    Volume (Year): 72 (2011)
    Issue (Month): 2 (June)
    Pages: 544-557

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    Handle: RePEc:eee:gamebe:v:72:y:2011:i:2:p:544-557

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    Web page: http://www.elsevier.com/locate/inca/622836

    Related research

    Keywords: Bilateral trading Naive traders Efficiency Ex-post individual rationality;

    References

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    1. Bengt Holmstrom & Roger B. Myerson, 1981. "Efficient and Durable Decision Rules with Incomplete Information," Discussion Papers 495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    3. Leininger, W. & Linhart, P. B. & Radner, R., 1989. "Equilibria of the sealed-bid mechanism for bargaining with incomplete information," Journal of Economic Theory, Elsevier, vol. 48(1), pages 63-106, June.
    4. Robert Gibbons & Joseph Farrell, 1988. "Cheap Talk Can Matter in Bargaining," Working papers 482, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Ingela Alger & Régis Renault, 2006. "Screening Ethics When Honest Agents Care About Fairness ," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(1), pages 59-85, 02.
    6. Steven A. Matthews & Andrew Postlewaite, 1987. "Pre-Play Communication in Two-Person Sealed-Bid Double Auctions," Discussion Papers 744R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. Williams, Steven R., 1987. "Efficient performance in two agent bargaining," Journal of Economic Theory, Elsevier, vol. 41(1), pages 154-172, February.
    8. Valley, Kathleen & Thompson, Leigh & Gibbons, Robert & Bazerman, Max H., 2002. "How Communication Improves Efficiency in Bargaining Games," Games and Economic Behavior, Elsevier, vol. 38(1), pages 127-155, January.
    9. Radner, Roy & Schotter, Andrew, 1989. "The sealed-bid mechanism: An experimental study," Journal of Economic Theory, Elsevier, vol. 48(1), pages 179-220, June.
    10. Gresik, Thomas A., 1991. "Ex ante efficient, ex post individually rational trade," Journal of Economic Theory, Elsevier, vol. 53(1), pages 131-145, February.
    11. Saran Rene, 2009. "How Communication Improves Efficiency in Bargaining: Reconciling Theory with Evidence," Research Memorandum 022, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    12. Gresik, Thomas A., 1991. "The efficiency of linear equilibria of sealed-bid double auctions," Journal of Economic Theory, Elsevier, vol. 53(1), pages 173-184, February.
    13. Ingela Alger & Regis Renault, 2003. "Screening Ethics when Honest Agents Keep their Word," Boston College Working Papers in Economics 562, Boston College Department of Economics, revised 09 Nov 2004.
    14. Olivier Compte & Philippe Jehiel, 2006. "Veto Constraint in Mechanism Design: Inefficiency with Correlated Types," Levine's Bibliography 321307000000000085, UCLA Department of Economics.
    15. Hagerty, Kathleen M. & Rogerson, William P., 1987. "Robust trading mechanisms," Journal of Economic Theory, Elsevier, vol. 42(1), pages 94-107, June.
    16. Satterthwaite, Mark A. & Williams, Steven R., 1989. "Bilateral trade with the sealed bid k-double auction: Existence and efficiency," Journal of Economic Theory, Elsevier, vol. 48(1), pages 107-133, June.
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    Cited by:
    1. Abeler, Johannes & Becker, Anke & Falk, Armin, 2014. "Representative evidence on lying costs," Journal of Public Economics, Elsevier, vol. 113(C), pages 96-104.
    2. Abeler, Johannes & Becker, Anke & Falk, Armin, 2012. "Truth-Telling: A Representative Assessment," IZA Discussion Papers 6919, Institute for the Study of Labor (IZA).
    3. Saran, Rene, 2012. "How Naiveté improves efficiency in trading with preplay communication," Economics Letters, Elsevier, vol. 117(1), pages 311-314.

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