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When Less Information is Good for Efficiency: Private Information in Bilateral Trade and in Markets

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  • Stephan Lauermann

Abstract

We consider a simple bilateral trading game between a seller and a buyer who have private valuations for an indivisible good. The seller makes a price offer which the buyer can either accept or reject. If the seller can observe the valuation of the buyer (if information is symmetric), then the trading outcome is trivially efficient. If the seller can not observe the valuation (if information is asymmetric), then the outcome must be inefficient, as is known from the Myerson-Satterthwaite Impossibility Theorem. We embed this bilateral trading game between a single buyer and a single seller into a matching market with a continuum of traders. We show that in this market the relation between information and efficiency is reversed. In particular, if information is symmetric, trading in the market is, in fact, inefficient.

Suggested Citation

  • Stephan Lauermann, 2008. "When Less Information is Good for Efficiency: Private Information in Bilateral Trade and in Markets," 2008 Meeting Papers 419, Society for Economic Dynamics.
    • Handle: RePEc:red:sed008:419
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    References listed on IDEAS

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    1. Shneyerov, Artyom & Wong, Adam Chi Leung, 2010. "Bilateral matching and bargaining with private information," Games and Economic Behavior, Elsevier, vol. 68(2), pages 748-762, March.
    2. Alp E. Atakan, 2006. "Competitive Equilibria in Decentralized Matching with Incomplete Information," Discussion Papers 1437, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Leonardo Felli & Kevin Roberts, 2016. "Does Competition Solve the Hold-up Problem?," Economica, London School of Economics and Political Science, vol. 83(329), pages 172-200, January.
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    5. Gale, Douglas, 1987. "Limit theorems for markets with sequential bargaining," Journal of Economic Theory, Elsevier, vol. 43(1), pages 20-54, October.
    6. Stephan Lauermann, 2008. "Price Setting in a Decentralized Market and the Competitive Outcome," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2008_06, Max Planck Institute for Research on Collective Goods.
    7. Mark Satterthwaite & Artyom Shneyerov, 2007. "Dynamic Matching, Two-Sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition," Econometrica, Econometric Society, vol. 75(1), pages 155-200, January.
    8. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
    9. Roman Inderst, 2001. "Screening in a Matching Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(4), pages 849-868.
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    Cited by:

    1. Stephan Lauermann, 2013. "Dynamic Matching and Bargaining Games: A General Approach," American Economic Review, American Economic Association, vol. 103(2), pages 663-689, April.

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