Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: We propose novel mechanisms for bilateral trade in settings where the buyer's and seller's values are interdependent. In the simplest such mechanism, buyer and seller submit bids; the probability of trade is a function of the sum of bids; and trade occurs at a price that is a weighted average of a high and low price, with weights proportional to the buyer's and seller's bids. We also construct variants of this mechanism in which the buyer or seller can unilaterally decide to sell back or buy back the good. These mechanisms provide non-trivial guarantees for gains from trade, regardless of the structure of the traders' information and the equilibrium that is played. Moreover, these guarantees are shown to be unimprovable in a class of environments with binary values and commonly known gains from trade. Complementary with the mechanisms we propose, we also describe those information structures which are the most challenging from the perspective of maximizing gains from trade.

Written with Benjamin Brooks