Publication Type

Working Paper

Version

publishedVersion

Publication Date

3-2024

Abstract

Cremer and McLean (1988) show that the seller can extract full surplus almost always by an incentive compatible, individually rational mechanism in a single-unit auction model with a finite type space in which agents’ beliefs are correlated and their valuations can be interdependent. We first show that this paradoxically positive result can be extended to a model of bilateral trades. To make it more realistic, we investigate when ex-post efficiency and ex-post budget balance in bilateral trades can also be achieved by an incentive compatible, individually rational mechanism. We identify a necessary condition for the existence of such mechanisms and show that it is also sufficient for a two-type model. We next show that the identified condition is not sufficient in general. Through a series of examples, we show that the imposition of ex post budget balance in a bilateral trade model induces a delicate interaction between interdependent values and correlated beliefs, so that the existence of incentive compatible, individually rational mechanisms becomes a very subtle problem. Finally, focusing on a model with linear valuations, we give the precise sense in which a possibility result under interdependent values is more fragile than that under private values.

Keywords

Bilateral Trade, Interdependence, Correlation

Discipline

Economics | International Economics

Research Areas

International Economics

First Page

1

Last Page

60

Publisher

SMU Economics and Statistics Working Paper Series, Paper No. 04-2024

City or Country

Singapore

Embargo Period

5-6-2024

Copyright Owner and License

Authors

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