Efficient Bilateral Trade with Interdependent Values: The Use of Two-Stage Mechanisms

As efficient, voluntary bilateral trades are generally not incentive compatible in an interdependent-value environment (Fieseler, Kittsteiner, Moldovanu (2003) and Gresik (1991)), we seek for more positive results by employing two-stage mechanisms (Mezzetti (2004)). We say that a two-stage mechanism satisfies incentive compatibility if the truth-telling in both stages constitutes an equilibrium strategy.First, we show by means of a stylized example that the generalized two-stage Groves mechanism never guarantees voluntary trade, while it satisfies efficiency and incentive compatibility. In a general environment, we next propose Assumption 1 under which there exists a two-stage incentive compatible mechanism implementing an efficient, voluntary trade. Third, within the same example, we confirm that our Assumption 1 is very weak because it holds as long as the buyer’s degree of interdependence of preferences is not too high relative to the seller’s counterpart. Finally, we show by the same example that if Assumption 1 is violated, our proposed two-stage mechanism fails to achieve voluntary trade.