Ulric B. and Evelyn L. Bray Social Sciences Seminar
Abstract: A complete complete characterization of bilateral trade mechanisms under ex-post incentive and participation constraints and no subsidies (as opposed to strict budget balance). The method, which is also novel, is based on convexity (as opposed to envelope theorem arguments, which in this case cannot handle the problem). I will demonstrate that disposing of the numeraire is in some cases optimal for welfare -- it may attain a (Pareto) more efficient allocation under the constraints. The characterization is useful, for example for finding an optimal solution to the problem of a broker (with no private information) who wants to attain optimal profit, under the incentive and participation constraints of the two traders, by charging trading fees to the two traders. In part 2, time permitting, I will describe a new approach to a decentralized exchange, where many traders may interact in pair-wise exchanges of many different (non-heterogenous) goods. Traders are bound by tight budget constraints so that monetary transfers are not sufficient to facilitate exchange of goods.