Publication Type
Journal Article
Version
acceptedVersion
Publication Date
4-2015
Abstract
This paper considers the problem of allocating an object between two players in an environment with one sided asymmetric information when their reservation payoffs depend on the type of the informed player, causing the reservation payoff of the uninformed player to be unobservable to her. Inefficiency arises naturally in this setting and can be characterized by a simple condition on the reservation payoffs that is necessary and sufficient. I derive the necessary and sufficient condition for the existence of an implementable allocation that at least weakly dominates the reservation payoffs. Under a mild assumption on the distribution of types, I characterize the surplus maximizing mechanism in the second best setting. I argue that the model applies to an environment where property rights over the object are not well defined and are subject to costly enforcement. In such cases, type dependent reservation payoffs arise naturally as the uninformed player's expectation from the enforcement process. The model can explain why the best ways of avoiding costly dispute resolution, such as arbitration as a way of avoiding litigation, typically involve a degree of inefficiency.
Discipline
Economics | Economic Theory
Research Areas
Economic Theory
Publication
Social Choice and Welfare
Volume
44
Issue
4
First Page
833
Last Page
859
ISSN
0176-1714
Identifier
10.1007/s00355-014-0863-2
Publisher
Springer
Citation
ANEY, Madhav S..
Inefficiency in the shadow of unobservable reservation payoffs. (2015). Social Choice and Welfare. 44, (4), 833-859.
Available at: https://ink.library.smu.edu.sg/soe_research/1870
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1007/s00355-014-0863-2