Efficient Bilateral Trade with Interdependent Values: The Use of Two-Stage Mechanisms

Efficient, voluntary bilateral trades are generally not implementable in an interdependent values environment where agents’ information is ex ante symmetric (i.e., both parties have private information and each party’s valuation depends on the other’s information in the same way). Thus, we seek more positive results by employing two-stage mechanisms in which (i) the outcome (e.g., allocation of the goods) is determined first; (ii) the agents partially learn the state via their own outcome-decision payoffs; and (iii) transfers are finally made. We propose the approximate shoot-the-liar (AS) mechanism and generalized shoot-the-liar (GS) mechanism and identify mild conditions for each mechanism to have the desired properties. The AS mechanism ensures “approximately” efficient, voluntary trades. We also establish that if we ensure (exactly) efficient, voluntary trades, there is no loss of generality in focusing on the GS mechanism. We then identify a necessary and sufficient condition for the GS mechanism to implement efficient, voluntary trades.