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Bilateral trading with naive traders

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  • Saran, Rene

Abstract

We introduce naive traders in bilateral trading. These traders report their true types in direct mechanisms and bid/ask their values/costs in auctions. We show that by expropriating naive traders in direct mechanisms, the mechanism designer can subsidize additional trades by strategic traders and improve efficiency. In fact, complete expropriation of naive traders is a necessary condition for constrained efficiency. A significant implication is that in the presence of naive traders, ex-post individually rational mechanisms are not constrained efficient. In contrast, if the traders must use a given mechanism, then the introduction of naive traders has an ambiguous effect on efficiency.

Suggested Citation

  • Saran, Rene, 2011. "Bilateral trading with naive traders," Games and Economic Behavior, Elsevier, vol. 72(2), pages 544-557, June.
  • Handle: RePEc:eee:gamebe:v:72:y:2011:i:2:p:544-557
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    References listed on IDEAS

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    Cited by:

    1. Abeler, Johannes & Becker, Anke & Falk, Armin, 2012. "Truth-Telling: A Representative Assessment," IZA Discussion Papers 6919, Institute for the Study of Labor (IZA).
    2. Heinrich, Timo & Brosig-Koch, Jeannette, 2015. "Promises and Social Distance in Buyer-Determined Procurement Auctions," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112892, Verein für Socialpolitik / German Economic Association.
    3. Saran, Rene, 2012. "How Naiveté improves efficiency in trading with preplay communication," Economics Letters, Elsevier, vol. 117(1), pages 311-314.
    4. Abeler, Johannes & Becker, Anke & Falk, Armin, 2014. "Representative evidence on lying costs," Journal of Public Economics, Elsevier, vol. 113(C), pages 96-104.
    5. Ognedal, Tone, 2016. "Morality in the market," Journal of Economic Behavior & Organization, Elsevier, vol. 129(C), pages 100-115.

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