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Welfare optimal information structures in bilateral trade

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  • Christoph SchottmÑŒller

Abstract

This paper analyzes the welfare maximizing information structure (and mechanism) in a bilateral trade setting. The welfare loss in the optimal information structure constitutes the minimal welfare loss due to asymmetric information. With binary underlying types it is shown that more than 95% of first best welfare can be achieved while the optimal mechanism without information design may achieve less than 90% of first best welfare. For more general type distributions, the optimal information structure is a monotone partition of the type space and the optimal mechanism is deterministic. A closed form solution is derived for the binary type case.

Suggested Citation

  • Christoph SchottmÑŒller, 2019. "Welfare optimal information structures in bilateral trade," Working Paper Series in Economics 98, University of Cologne, Department of Economics.
    • Handle: RePEc:kls:series:0098
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    References listed on IDEAS

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