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Efficient trading on a network with incomplete information

Author

Listed:
  • Hu Lu

    (Applied Research and Analysis Directorate, Health Canada)

  • Yuntong Wang

    (Department of Economics, University of Windsor)

Abstract

This paper considers a trading problem on a network with incomplete information. We consider a simple water trading problem in which three agents are located in a linear order along a river. Upper stream agents can sell some amount of the water to their downstream but not the other way around. The middle agent can be both a seller and a buyer. Agents have private information on their utility of water, which we assume is non- linear. We ask if there is an efficient trading mechanism for the allocation of water. We show that if agents have highly asymmetric initial endowments of water, incentive-compatible, individually rational, budget-balanced mechanisms exist that are also ex-post efficient.

Suggested Citation

  • Hu Lu & Yuntong Wang, 2014. "Efficient trading on a network with incomplete information," Working Papers 1405, University of Windsor, Department of Economics.
    • Handle: RePEc:wis:wpaper:1405
    as

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    File URL: http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1405.pdf
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    References listed on IDEAS

    as
    1. Mike Young & Darla Hatton MacDonald, 2000. "Interstate Water Trading: a 2-year Review," Natural Resource Management Economics 00_001, Policy and Economic Research Unit, CSIRO Land and Water, Adelaide, Australia.
    2. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    3. Lu, Hu & Robert, Jacques, 2001. "Optimal Trading Mechanisms with Ex Ante Unidentified Traders," Journal of Economic Theory, Elsevier, vol. 97(1), pages 50-80, March.
    4. Ambec, S. & Ehlers, L., 2007. "Cooperation and equity in the river sharing problem," Working Papers 200705, Grenoble Applied Economics Laboratory (GAEL).
    5. Blume, Lawrence E. & Easley, David & Kleinberg, Jon & Tardos, Éva, 2009. "Trading networks with price-setting agents," Games and Economic Behavior, Elsevier, vol. 67(1), pages 36-50, September.
    6. D. Kilgour & Ariel Dinar, 2001. "Flexible Water Sharing within an International River Basin," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 18(1), pages 43-60, January.
    7. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
    8. Wang, Yuntong, 2011. "Trading water along a river," Mathematical Social Sciences, Elsevier, vol. 61(2), pages 124-130, March.
    9. Dinar, Ariel & Wolf, Aaron, 1994. "International Markets for Water and the Potential for Regional Cooperation: Economic and Political Perspectives in the Western Middle East," Economic Development and Cultural Change, University of Chicago Press, vol. 43(1), pages 43-66, October.
    10. Hu Lu & Yuntong Wang, 2009. "Efficient trading with restriction," Review of Economic Design, Springer;Society for Economic Design, vol. 13(4), pages 319-334, December.
    11. Lu, Hu & Wang, Yuntong, 2010. "Efficient trading with nonlinear utility," Journal of Mathematical Economics, Elsevier, vol. 46(4), pages 595-606, July.
    12. Barret, Scott & DEC, 1994. "Conflict and cooperation in managing international water resources," Policy Research Working Paper Series 1303, The World Bank.
    13. Giannias, Dimitrios A. & Lekakis, Joseph N., 1997. "Policy analysis for an amicable, efficient and sustainable inter-country fresh water resource allocation," Ecological Economics, Elsevier, vol. 21(3), pages 231-242, June.
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    More about this item

    Keywords

    Network; Incomplete Information; Water Trading; Mechanism Design.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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