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Bilateral trading with naive traders

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  • Saran, Rene

Abstract

We introduce naive traders in bilateral trading. These traders report their true types in direct mechanisms and bid/ask their values/costs in auctions. We show that by expropriating naive traders in direct mechanisms, the mechanism designer can subsidize additional trades by strategic traders and improve efficiency. In fact, complete expropriation of naive traders is a necessary condition for constrained efficiency. A significant implication is that in the presence of naive traders, ex-post individually rational mechanisms are not constrained efficient. In contrast, if the traders must use a given mechanism, then the introduction of naive traders has an ambiguous effect on efficiency.

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  • Saran, Rene, 2011. "Bilateral trading with naive traders," Games and Economic Behavior, Elsevier, vol. 72(2), pages 544-557, June.
    • Handle: RePEc:eee:gamebe:v:72:y:2011:i:2:p:544-557
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    References listed on IDEAS

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    Cited by:

    1. Abeler, Johannes & Becker, Anke & Falk, Armin, 2012. "Truth-Telling: A Representative Assessment," IZA Discussion Papers 6919, Institute of Labor Economics (IZA).
    2. Malmendier, Ulrike & Szeidl, Adam, 2020. "Fishing for fools," Games and Economic Behavior, Elsevier, vol. 122(C), pages 105-129.
    3. Crawford, Vincent P., 2021. "Efficient mechanisms for level-k bilateral trading," Games and Economic Behavior, Elsevier, vol. 127(C), pages 80-101.
    4. Kiho Yoon, 2020. "Bilateral trading with contingent contracts," International Journal of Game Theory, Springer;Game Theory Society, vol. 49(2), pages 445-461, June.
    5. Possajennikov, Alex & Saran, Rene, 2023. "(In)efficiency in private value bargaining with naive players: Theory and experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 42-61.
    6. Heinrich, Timo & Brosig-Koch, Jeannette, 2015. "Promises and Social Distance in Buyer-Determined Procurement Auctions," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112892, Verein für Socialpolitik / German Economic Association.
    7. Saran, Rene, 2012. "How Naiveté improves efficiency in trading with preplay communication," Economics Letters, Elsevier, vol. 117(1), pages 311-314.
    8. Kneeland, Terri, 2022. "Mechanism design with level-k types: Theory and an application to bilateral trade," Journal of Economic Theory, Elsevier, vol. 201(C).
    9. Abeler, Johannes & Becker, Anke & Falk, Armin, 2014. "Representative evidence on lying costs," Journal of Public Economics, Elsevier, vol. 113(C), pages 96-104.
    10. Ognedal, Tone, 2016. "Morality in the market," Journal of Economic Behavior & Organization, Elsevier, vol. 129(C), pages 100-115.

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