The bilateral trade model in a discrete setting

J. Flesch, M.J.W. Schröder, A.J. Vermeulen

Research output: Working paperProfessional

238 Downloads (Pure)

Abstract

We consider a bilateral trade model in which both players have a finite number of possible valuations. The seller's valuation and the buyer's 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.
Original languageEnglish
Place of PublicationMaastricht
PublisherMaastricht University, Graduate School of Business and Economics
Publication statusPublished - 1 Jan 2013

Publication series

SeriesGSBE Research Memoranda
Number025

Cite this

Flesch, J., Schröder, M. J. W., & Vermeulen, A. J. (2013). The bilateral trade model in a discrete setting. Maastricht University, Graduate School of Business and Economics. GSBE Research Memoranda, No. 025