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When Less Information is Good for Efficiency: Private Information in Bilateral Trade and in Markets

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  • Stephan Lauermann

Abstract

We consider a simple bilateral trading game between a seller and a buyer who have private valuations for an indivisible good. The seller makes a price offer which the buyer can either accept or reject. If the seller can observe the valuation of the buyer (if information is symmetric), then the trading outcome is trivially efficient. If the seller can not observe the valuation (if information is asymmetric), then the outcome must be inefficient, as is known from the Myerson-Satterthwaite Impossibility Theorem. We embed this bilateral trading game between a single buyer and a single seller into a matching market with a continuum of traders. We show that in this market the relation between information and efficiency is reversed. In particular, if information is symmetric, trading in the market is, in fact, inefficient.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 419.

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Date of creation: 2008
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Handle: RePEc:red:sed008:419

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  1. Felli, Leonardo & Roberts, Kevin W S, 2002. "Does Competition Solve the Hold-up Problem?," CEPR Discussion Papers 3535, C.E.P.R. Discussion Papers.
  2. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  3. Mark Satterthwaite & Artyom Shneyerov, 2007. "Dynamic Matching, Two-Sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition," Econometrica, Econometric Society, vol. 75(1), pages 155-200, 01.
  4. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
  5. Inderst, Roman, 2001. "Screening in a Matching Market," Review of Economic Studies, Wiley Blackwell, vol. 68(4), pages 849-68, October.
  6. Alp E. Atakan, 2010. "Competitive Equilibria in Decentralized Matching with Incomplete Information," Koç University-TUSIAD Economic Research Forum Working Papers 1031, Koc University-TUSIAD Economic Research Forum.
  7. Shneyerov, Art & Wong, Adam Chi Leung, 2007. "Bilateral Matching and Bargaining with Private Information," Microeconomics.ca working papers shneyerov-07-05-01-03-38-, Vancouver School of Economics, revised 01 May 2007.
  8. Satterthwaite, Mark & Shneyerov, Artyom, 2003. "Convergence of a Dynamic Matching and Bargaining Market with Two-sided Incomplete Information to Perfect Competition," Microeconomics.ca working papers shneyerov-03-12-17-09-36-, Vancouver School of Economics, revised 17 Dec 2003.
  9. Stephan Lauermann, 2008. "Price Setting in a Decentralized Market and the Competitive Outcome," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_06, Max Planck Institute for Research on Collective Goods.
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Cited by:
  1. Lauermann, Stephan, 2011. "Dynamic matching and bargaining games: A general approach," MPRA Paper 31717, University Library of Munich, Germany.
  2. Shneyerov, Art & Wong, Adam Chi Leung, 2007. "Bilateral Matching and Bargaining with Private Information," Microeconomics.ca working papers shneyerov-07-05-01-03-38-, Vancouver School of Economics, revised 01 May 2007.
  3. Stephan Lauermann, 2008. "Price Setting in a Decentralized Market and the Competitive Outcome," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_06, Max Planck Institute for Research on Collective Goods.

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