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Ex-post constrained-efficient bilateral trade with risk-averse traders

Čopič, Jernej and Ponsatí, Clara (2008) Ex-post constrained-efficient bilateral trade with risk-averse traders. . (Unpublished) https://resolver.caltech.edu/CaltechAUTHORS:20150817-101353471

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Abstract

We address robust mechanism design for bilateral trade of an indivisible commodity, under incomplete information on traders’ private reservation values. Under ex-post individual rationality and ex-post incentive compatibility, we define the notion of ex-post constrained-efficiency. It is weaker than interim constrained efficiency, and it is a notion of constrained optimality that is independent of the details of the distribution of types. When traders are risk neutral the class of ex-post constrained-efficient mechanisms is equivalent to probability distributions over posted prices. In general, among mechanisms satisfying incentive and participation constraints, a sufficient condition for constrained efficiency is simplicity: for each draw of types the outcome is a lottery between trade at one type-contingent price and no trade. For environments with constant relative risk aversion, we characterize simple mechanisms. Generically, simple mechanisms converge to full efficiency as agents’ risk aversion goes to infinity. Under risk neutrality, ex-ante optimal mechanisms are deterministic, and under risk aversion, they are not. Our results are suitable for applications.


Item Type:Report or Paper (Discussion Paper)
Contact Email Address:jernej@caltech.edu
Additional Information:We are very grateful to Federico Echenique, Aviad Heifetz, Matt Jackson, John Ledyard, Debrah Meloso, Preston McAfee, Phil Reny, Carmelo Rodríguez-Álvarez, Yves Sprumont, Bill Zame, and anoyimous referees. We also wish to thank Joaquim Bruna and Theo Strinopoulos for their help with partial differential equations. Financial support to Čopič from the Social and Information Science Lab at Caltech, and to Ponsatí from MEC is gratefully acknowledged.
Funders:
Funding AgencyGrant Number
Caltech Social and Information Sciences LaboratoryUNSPECIFIED
MEC (Spain)UNSPECIFIED
Subject Keywords:Bilateral trade, Risk aversion, Mechanism design, Incomplete Information, Ex-Post Implementation, Efficiency
Classification Code:JEL codes: C78, C79
Record Number:CaltechAUTHORS:20150817-101353471
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20150817-101353471
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:59578
Collection:CaltechAUTHORS
Deposited By: SWORD User
Deposited On:17 Aug 2015 17:31
Last Modified:03 Oct 2019 08:48

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