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The bilateral trade model in a discrete setting

Listed author(s):
  • Vermeulen A.J.
  • Schr?der M.J.W.
  • Flesch J.

    (GSBE)

We consider a bilateral trade model in which both players have a finite number of possible valuations. The sellers valuation and the buyers valuation for the object are private information, but the independent beliefs about these valuations are common knowledge. In this setting, we provide a characterization of the set of interim individually rational-implementable trading rules, analogous to the result of Myerson and Satterthwaite 1983. Thereafter, we derive necessary conditions for incentive compatible and ex post individually rational direct mechanisms. For the special class of corner mechanisms with discrete uniform beliefs, we characterize the set of ex post individually rational-implementable trading rules. In this context it is also shown that ex post efficiency can only be achieved if the number of different valuations is small. The maximal number of different valuations for which efficiency is still possible depends on the prior probability distribution of valuations.

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File URL: http://pub.maastrichtuniversity.nl/4dd6c6c5-4587-4dba-9019-3594f3105a08
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Paper provided by Maastricht University, Graduate School of Business and Economics (GSBE) in its series Research Memorandum with number 025.

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Date of creation: 2013
Handle: RePEc:unm:umagsb:2013025
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  1. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Gresik, Thomas A., 1991. "Efficient bilateral trade with statistically dependent beliefs," Journal of Economic Theory, Elsevier, vol. 53(1), pages 199-205, February.
  3. Thomas A. Gresik & Mark A. Satterthwaite, 1983. "The Number of Traders Required to Make a Market Competitive: The Beginnings of a Theory," Discussion Papers 551, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Hagerty, Kathleen M. & Rogerson, William P., 1987. "Robust trading mechanisms," Journal of Economic Theory, Elsevier, vol. 42(1), pages 94-107, June.
  5. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-1090, October.
  6. Matsuo, Toshihide, 1989. "On incentive compatible, individually rational, and ex post efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 49(1), pages 189-194, October.
  7. Gresik, Thomas A., 1991. "Ex ante efficient, ex post individually rational trade," Journal of Economic Theory, Elsevier, vol. 53(1), pages 131-145, February.
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