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Efficiency in repeated trade with hidden valuations

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  • Athey, Susan

    ()
    (Harvard University)

  • Miller, David A.

    ()
    (University of California, San Diego)

Abstract

We analyze the extent to which efficient trade is possible in an ongoing relationship between impatient agents with hidden valuations (i.i.d. over time), restricting attention to equilibria that satisfy ex post incentive constraints in each period. With ex ante budget balance, efficient trade can be supported in each period if the discount factor is at least one half. In contrast, when the budget must balance ex post, efficiency is not attainable, and furthermore for a wide range of probability distributions over their valuations, the traders can do no better than employing a posted price mechanism in each period. Between these extremes, we consider a "bank'' that allows the traders to accumulate budget imbalances over time, but only within a bounded range. We construct non-stationary equilibria that allow traders to receive payoffs that approach efficiency as their discount factor approaches one, while the bank earns exactly zero expected profits. For some probability distributions there exist equilibria that yield exactly efficient payoffs for the players and zero profits for the bank, but such equilibria require high discount factors.

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Bibliographic Info

Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 2 (2007)
Issue (Month): 3 (September)
Pages:

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Handle: RePEc:the:publsh:154

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Web page: http://econtheory.org

Related research

Keywords: Repeated trade; Myerson-Satterthwaite Theorem; repeated games; private information; dynamic mechanism design; ex post incentive compatibility; budget balance;

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References

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  1. Fudenberg, Drew & Levine, David I & Maskin, Eric, 1994. "The Folk Theorem with Imperfect Public Information," Econometrica, Econometric Society, vol. 62(5), pages 997-1039, September.
  2. Satterthwaite, Mark & Shneyerov, Artyom, 2008. "Convergence to perfect competition of a dynamic matching and bargaining market with two-sided incomplete information and exogenous exit rate," Games and Economic Behavior, Elsevier, vol. 63(2), pages 435-467, July.
  3. Kyle Bagwell, 2004. "Collusion and Price Rigidity," Theory workshop papers 658612000000000081, UCLA Department of Economics.
  4. Hagerty, Kathleen M. & Rogerson, William P., 1987. "Robust trading mechanisms," Journal of Economic Theory, Elsevier, vol. 42(1), pages 94-107, June.
  5. Jonathan Levin, 2003. "Relational Incentive Contracts," American Economic Review, American Economic Association, vol. 93(3), pages 835-857, June.
  6. Dirk Bergemann & Stephen Morris, 2003. "Robust Mechanism Design," Cowles Foundation Discussion Papers 1421R, Cowles Foundation for Research in Economics, Yale University, revised Apr 2004.
  7. Susan Athey & Andrew Atkeson & Patrick Kehoe, 2003. "The Optimal Degree of Discretion in Monetary Policy," NBER Working Papers 10109, National Bureau of Economic Research, Inc.
  8. Jeffrey C. Ely & Kim-Sau Chung, 2002. "Ex-Post Incentive Compatible Mechanism Design," Discussion Papers 1339, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Jonathan Levin & Susan Athey, 2001. "The Value of Information in Monotone Decision Problems," Working Papers 01003, Stanford University, Department of Economics.
  10. McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
  11. Tymon Tatur, 2005. "On the Trade off Between Deficit and Inefficiency and the Double Auction with a Fixed Transaction Fee," Econometrica, Econometric Society, vol. 73(2), pages 517-570, 03.
  12. Mark A. Satterthwaite & Steven R. Williams, 2002. "The Optimality of a Simple Market Mechanism," Econometrica, Econometric Society, vol. 70(5), pages 1841-1863, September.
  13. Swinkels, Jeroen M, 2001. "Efficiency of Large Private Value Auctions," Econometrica, Econometric Society, vol. 69(1), pages 37-68, January.
  14. Matthew O Jackson & Hugo F Sonnenschein, 2007. "Overcoming Incentive Constraints by Linking Decisions -super-1," Econometrica, Econometric Society, vol. 75(1), pages 241-257, 01.
  15. d'ASPREMONT, Claude & GERARD-VARET, Louis-André, . "Incentives and incomplete information," CORE Discussion Papers RP -354, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  16. Athey, Susan & Bagwell, Kyle, 2001. "Optimal Collusion with Private Information," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 428-65, Autumn.
  17. Groves, Theodore, 1973. "Incentives in Teams," Econometrica, Econometric Society, vol. 41(4), pages 617-31, July.
  18. Taub, Bart, 1994. "Currency and Credit Are Equivalent Mechanisms," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 921-56, November.
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Citations

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Cited by:
  1. Alberto Martin & Wouter Vergote, 2005. "On the role of retaliation in trade agreements," Economics Working Papers 914, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
  2. Drexl, Moritz & Kleiner, Andreas, 2013. "Preference Intensities in Repeated Collective Decision-Making," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79832, Verein für Socialpolitik / German Economic Association.
  3. Susan Athey & Ilya Segal, 2007. "An Efficient Dynamic Mechanism," Levine's Bibliography 122247000000001134, UCLA Department of Economics.
  4. Blundell,Richard & Newey,Whitney K. & Persson,Torsten (ed.), 2006. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521692083, October.
  5. Eilat, Ran & Pauzner, Ady, 2011. "Optimal bilateral trade of multiple objects," Games and Economic Behavior, Elsevier, vol. 71(2), pages 503-512, March.

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