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Informationally robust trade and limits to contagion

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  • Carroll, Gabriel

Abstract

Two agents can each accept or reject a proposed deal, whose value for each agent depends on an unknown state, and may be positive or negative. The deal takes place only if both accept. Each agent can be imperfectly informed, in an arbitrary way, about both her own value and the other agent's. In such environments, contagious adverse selection may prevent the deal from being reached even when it is mutually beneficial ex post. We give an upper bound on the ex-ante expected welfare loss in equilibrium due to such contagion, valid for any information structure. The welfare loss is small if negative values are unlikely ex ante; and under an assumption of known aggregate gains from the deal, our bound is sharp. The bound has a succinct description, even though the equilibrium itself, in any given information structure, may be hard to describe explicitly.

Suggested Citation

  • Carroll, Gabriel, 2016. "Informationally robust trade and limits to contagion," Journal of Economic Theory, Elsevier, vol. 166(C), pages 334-361.
  • Handle: RePEc:eee:jetheo:v:166:y:2016:i:c:p:334-361
    DOI: 10.1016/j.jet.2016.09.003
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    Cited by:

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    2. Wanchang Zhang, 2021. "Robust Bilateral Trade Mechanisms with Known Expectations," Papers 2105.05427, arXiv.org.
    3. Vinicius Carrasco & Vitor Farinha Luz & Paulo K. Monteiro & Humberto Moreira, 2019. "Robust mechanisms: the curvature case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 203-222, July.
    4. Mass, Helene, 2018. "Strategies under strategic uncertainty," ZEW Discussion Papers 18-055, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    Adverse selection; Contagion; Information structure; Robustness;
    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
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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