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The broker-optimal bilateral trading mechanisms with linear contracts

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  • Pan, Lijun
  • Wang, Dazhong

Abstract

We introduce a linear contract to the bilateral trading model with a broker in Myerson and Satterthwaite (Section 5, 1983). Among all the incentive-compatible and individually rational direct bilateral trading mechanisms, we provide a characterization of the broker-optimal direct bilateral trading mechanisms when the buyer makes a non-negative cash payment. In the optimal mechanism, the buyer makes zerocash payment, and shares equity with the seller. This mechanism enables the broker to gain higher profits than that in Myerson and Satterthwaite (1983). A dominant strategy implementation is also proposed. We also discuss the optimal mechanism when the buyer is allowed to be subsidized.

Suggested Citation

  • Pan, Lijun & Wang, Dazhong, 2021. "The broker-optimal bilateral trading mechanisms with linear contracts," Economics Letters, Elsevier, vol. 208(C).
    • Handle: RePEc:eee:ecolet:v:208:y:2021:i:c:s0165176521003323
    DOI: 10.1016/j.econlet.2021.110055
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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