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Markets, Bargaining, and Networks with Heterogeneous Agents

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Author Info

  • Arnold Polanski

    (University of East Anglia)

  • Fernando Vega-Redondo

    (European University Institute)

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    Abstract

    The paper proposes an intertemporal model of bargaining among heterogeneous buyers and sellers placed on a bipartite network. First, it characterizes conditions on the network under which its trading restrictions are inessential and the outcome is arbitrage-free. Instead, when the system is segmented in different trading components, we show how these come about and how prices are determined in each of them. Second, we turn to the issue of network endogeneity, focusing on those networks that are Pairwise Stable. Such networks are shown to always exist and be arbitrage-free. In the latter respect, therefore, they satisfy one of the key properties displayed by frictionless markets. We identify, however, a sharp contrast regarding another key feature: Pairwise-Stable networks are generically inefficient if the matching process is genuinely decentralized. This uncovers a fundamental incompatibility between individual incentives and social welfare in endogenous trading networks. We explain that such incompatibility is not only due to buyer/seller heterogeneity but is also caused by the incentives underlying network formation in a trading context.

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    File URL: http://www.uea.ac.uk/menu/depts/eco/research/RePEc/uea/papers_pdf/UEA-AFE-038.pdf
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    Bibliographic Info

    Paper provided by School of Economics, University of East Anglia, Norwich, UK. in its series University of East Anglia Applied and Financial Economics Working Paper Series with number 038.

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    Date of creation: Mar 2013
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    Handle: RePEc:uea:aepppr:2012_38

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    References

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    1. Rubinstein, Ariel & Wolinsky, Asher, 1990. "Decentralized Trading, Strategic Behaviour and the Walrasian Outcome," Review of Economic Studies, Wiley Blackwell, vol. 57(1), pages 63-78, January.
    2. Roberto Serrano, 2000. "Decentralized Information and the Walrasian Outcome:A Pairwise Meetings Market with Private Values," Working Papers 2000-13, Brown University, Department of Economics.
    3. Shneyerov, Artyom & Wong, Adam Chi Leung, 2010. "Bilateral matching and bargaining with private information," Games and Economic Behavior, Elsevier, vol. 68(2), pages 748-762, March.
    4. Arial Rubinstein & Asher Wolinsky, 1985. "Equilibrium in a Market with Sequential Bargaining," Levine's Working Paper Archive 623, David K. Levine.
    5. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    6. Gianni De Fraja & Jozsef Sakovics, 2004. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," ESE Discussion Papers 36, Edinburgh School of Economics, University of Edinburgh.
    7. Arnold Polanski & Emiliya A. Lazarova, 2011. "Dynamic Multilateral Markets," Working Papers 2011.44, Fondazione Eni Enrico Mattei.
    8. Mihai Manea, 2011. "Bargaining in Stationary Networks," American Economic Review, American Economic Association, vol. 101(5), pages 2042-80, August.
    9. Lauermann, Stephan, 2012. "Asymmetric information in bilateral trade and in markets: An inversion result," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1969-1997.
    10. Corominas-Bosch, Margarida, 2004. "Bargaining in a network of buyers and sellers," Journal of Economic Theory, Elsevier, vol. 115(1), pages 35-77, March.
    11. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
    12. Polanski, Arnold, 2007. "Bilateral bargaining in networks," Journal of Economic Theory, Elsevier, vol. 134(1), pages 557-565, May.
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