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A note on Pareto-optimal taxation mechanism in noncooperative strategic bilateral exchange

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  • Julien, Ludovic A.
  • Yebarth, Gagnie P.

Abstract

This paper investigates the taxation mechanism implemented in strategic bilateral exchange by Gabszewicz and Grazzini (1999). These authors show that endowment taxation with transfers can implement a Pareto-optimal allocation when the preferences of traders are represented by some specific homothetic utility functions. We show that this taxation mechanism can also implement a Pareto-optimal allocation when the preferences of traders are represented by non homothetic utility functions. To this end, we consider a class of quasi-linear utility functions. Furthermore, we illustrate that, with quasi-linear utility functions, by introducing heterogeneity between traders, there are other environments in which this taxation mechanism implements a Pareto-optimal outcome.

Suggested Citation

  • Julien, Ludovic A. & Yebarth, Gagnie P., 2026. "A note on Pareto-optimal taxation mechanism in noncooperative strategic bilateral exchange," Mathematical Social Sciences, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:matsoc:v:139:y:2026:i:c:s0165489625001076
    DOI: 10.1016/j.mathsocsci.2025.102492
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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