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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

Paper provided by UCLA Department of Economics in its series Levine's Bibliography with number 784828000000000256.

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Date of creation: 15 Jul 2006
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Handle: RePEc:cla:levrem:784828000000000256

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Find related papers by JEL classification:

• C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
• C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
• L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

This paper has been announced in the following NEP Reports:

• NEP-ALL-2005-08-03 (All new papers)
• NEP-EXP-2005-08-03 (Experimental Economics)

References

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Cited by:

1. 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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