Selling an asset to a competitor

A seller decides whether to allocate an item among two potential buyers. The seller and buyer 1 interact ex post in such a way that each of them suffers a negative externality if the other possesses the item. We show that the optimal allocation rule favors buyer 2, who does not interact ex post with the seller, and in particular bidder 1 may not obtain the good even if his valuation is highest. The auction is therefore subject to resale. When resale is possible, the seller must distort the original auction. We show that the mechanism depends crucially on the way resale is organized ex post. The seller may decide to always allocate the good to the agent with the highest valuation when rents are fully extracted by an intermediary on the resale market. However, she may resort to a stochastic mechanism when the winner of the primary auction has full bargaining power in the resale stage.     

Optimal mechanism design with resale via bargaining

In this paper, we examine the optimal mechanism design of selling an indivisible object to one regular buyer and one publicly known buyer, where inter-buyer resale cannot be prohibited. The resale market is modeled as a stochastic ultimatum bargaining game between the two buyers. We fully characterize an optimal mechanism under general conditions. Surprisingly, in this optimal mechanism, the seller never allocates the object to the regular buyer regardless of his bargaining power in the resale market. The seller sells only to the publicly known buyer, and reveals no additional information to the resale market. The possibility of resale causes the seller to sometimes hold back the object, which under our setup is never optimal if resale is prohibited. We find that the seller?s revenue is increasing in the publicly known buyer?s bargaining power in the resale market. When the publicly known buyer has full bargaining power, Myerson?s optimal revenue is achieved; when the publicly known buyer has no bargaining power, a conditionally efficient mechanism prevails.     

A Unique Informationally Efficient Allocation Mechanism In Economies With Consumption Externalities*

This article investigates the informational requirements of resource allocation processes in pure exchange economies with consumption externalities. It is shown that the distributive Lindahl mechanism has a minimal informational size of the message space, and thus it is informationally the most efficient allocation process that is informationally decentralized and realizes Pareto‐efficient allocations over the class of economies that include nonmalevolent economies. Furthermore, it is shown that the distributive Lindahl mechanism is the unique informationally efficient decentralized mechanism that realizes Pareto‐efficient and individually rational allocations over a certain class of nonmalevolent economies.     

Duality theory for dynamic optimization models of economics: The continuous time case

This paper establishes that the competitive allocation process is the only informationally decentralized mechanism for exchange environments which (i) achieves Pareto optimal allocations; (ii) gives each consumer an allocation which is, according to his preferences, at least as good as his endowment; (iii) satisfies certain regularity conditions; and (iv) has a message space of the smallest dimension necessary to satisfy (i–iii).     

Efficient Sorting in a Dynamic Adverse-Selection Model

We discuss a class of markets for durable goods where efficiency (or approximate efficiency) is obtained despite the presence of information asymmetries. In the model, the number of times a good has changed hands (the vintage of the good) is an accurate signal of its quality, each consumer self-selects into obtaining the vintage that the social planner would have assigned to her, and consumers' equilibrium trading behaviour in secondary markets is not subject to adverse selection. We show that producers have the incentive to choose contracts that lead to the efficient allocation, and to supply the efficient output. We also provide a contrast between leasing contracts, resale contracts, and different kinds of rental contracts. Resale contracts do not lead to the efficient allocation. A specific kind of rental contract provides the appropriate incentives to consumers.     

Convergence to perfect competition of a dynamic matching and bargaining market with two-sided incomplete information and exogenous exit rate

Consider a decentralized, dynamic market with an infinite horizon and incomplete information in which buyers and sellers' values for the traded good are private and independently drawn. Time is discrete, each period has length δ, and each unit of time a large number of new buyers and sellers enter the market. Within a period each buyer is matched with a seller and each seller is matched with zero, one, or more buyers. Every seller runs a first price auction with a reservation price and, if trade occurs, the seller and winning buyer exit with their realized utility. Traders who fail to trade either continue in the market to be rematched or exit at an exogenous rate. We show that in all steady state, perfect Bayesian equilibria, as δ approaches zero, equilibrium prices converge to the Walrasian price and realized allocations converge to the competitive allocation.     

MEETINGS AND MECHANISMS

This article shows how meeting frictions affect equilibrium trading mechanisms and allocations in an environment where identical sellers post mechanisms to compete for buyers with ex ante heterogeneous private valuations. Multiple submarkets can emerge, each consisting of all sellers posting a particular mechanism and the buyers who visit those sellers. Under mild conditions, high-valuation buyers are all located in the same submarket, and low valuation buyers can be in: (i) the same submarket, (ii) a different submarket, and (iii) a mixture of (i) and (ii). The decentralized equilibrium is efficient when sellers can post auctions with reserve prices or entry fees.     

An Optimal Auction for Complements

This paper considers the optimal selling mechanism for complementary items. When buyers are perfectly symmetric, the optimal procedure is to bundle the items and run a standard auction. In general, however, bundling the items is not necessarily desirable, and the standard auctions do not maximize revenue. Moreover, the optimal auction allocation may not be socially efficient since the auction must discriminate against bidders who have strong incentives to misrepresent their true preferences.Journal of Economic LiteratureClassification Number: D44.     

Farmers’ performance and subject pool effect in decentralized bargaining markets

We report results from a decentralized bargaining market experiment conducted with farmers and students. Our results indicate that despite its bad reputation, performance is highly efficient (although not as efficient as the competitive equilibrium prediction). Farmers and students perform similarly regarding quantities, prices, and allocative efficiencies, but not regarding payoff allocations between buyers and sellers.     

On the Efficiency of Job Search with Social Networks

This paper provides a simple matching model in which unemployed workers and employers can be matched together through social networks and through more efficient, and also more costly, methods. In this framework, decentralized decisions to utilize social networks in the job search process can be inefficient and give rise to multiple equilibria. More precisely, in a decentralized equilibrium, social networks can be overutilized, with respect to an efficient allocation, in some circumstances and underutilized in others. Moreover, the existence of different job search methods can give rise to a higher job search intensity than the efficient one. This is in sharp contrast with the standard result, derived in matching models, according to which search intensity is always too low if not efficient. Finally, in the presence of different job search methods, conditional unemployment benefits hikes, which can be used as a coordination device to improve welfare when individuals.     

Seller competition by mechanism design

This paper analyzes a market game in which sellers offer trading mechanisms to buyers and buyers decide which seller to go to depending on the trading mechanisms offered. In a (subgame perfect) equilibrium of this market, sellers hold auctions with an efficient reserve price but charge an entry fee. The entry fee depends on the number of buyers and sellers, the distribution of buyer valuations, and the buyer cost of entering the market. As the size of the market increases, the entry fee decreases and converges to zero in the limit. We study how the surplus of buyers and sellers depends on the number of agents on each side of the market in this decentralized trading environment.     

Efficiency in a search and matching model with training costs

This paper studies the efficiency of the search and matching model with training costs. I incorporate productivity enhancing firm-specific skill training into the search and matching model of Pissarides (2000). I demonstrate that while the decentralized economy can be efficient if training costs are not sunk at the time of wage determination, the decentralized economy is not efficient due to a hold-up problem if training costs are sunk.     

Turnover Externalities with Marketplace Trading

This article considers equilibrium decentralized trade when there is a marketplace where buyers and sellers meet costlessly. Since buyers have idiosyncratic match payoffs for each seller's good, some buyers, rather than trade with the current stock of sellers, wait for new sellers to enter the marketplace to obtain a good they like. A turnover externality exists where all traders are better off with higher entry rates of new traders. Furthermore, this turnover externality supports multiple Pareto-rankable equilibria. This provides new insights into similar results obtained in the random-matching literature.     

Resale Markets and the Assignment of Property Rights

The consumption of an indivisible good causes identity-dependent externalities to non-consumers. We analyse resale markets where the current owner designs the trading procedure, but cannot commit to future actions. We ask the following questions: (1) Does the identity of the initial owner matter for the determination of the final consumer? (2) Is the outcome always efficient? The major conclusion of our paper is that the irrelevance of the initial structure of property rights arises in resale processes even if there are transaction costs that hinder efficiency. This result complements the Coasian view where the irrelevance of the assignment of property rights is a consequence of efficiency.     

Private versus public production of information

This paper re-examines a recent article by Grossman and Stiglitz (1980) where information production is shown to be fundamentally incompatible with decentralized market systems. Based upon their model, public production of information is discussed as a natural alternative. Three main implications of the analysis are: (i) the market can be informationally efficient with public production of information, (ii) there exists an informational equilibrium and the resulting allocation is Pareto efficient, and (iii) although the optimal level of information critically depends upon information users' preferences and endowments, their complete knowledge t the societal level is not necessary for public production of information.     

Mechanisms for a spatially distributed market

We consider the problem of a spatially distributed market with strategic agents. A single good is traded in a set of independent markets, where shipment between markets is possible but costly. The problem has previously been studied in the non-strategic case, in which it can be analyzed and solved as a min-cost-flow problem. We consider the case where buyers and sellers are strategic. Our first result gives a double characterization of the VCG prices, first as distances in a certain residue graph and second as the minimal (for buyers) and maximal (for sellers) equilibrium prices. This provides a computationally efficient, individually rational and incentive compatible welfare maximizing mechanism. This mechanism is, necessarily, not budget balanced and we also provide a budget-balanced mechanism (which is also computationally efficient, incentive compatible and individually rational) that achieves high welfare. Finally, we present results for some extensions of the model.     

Internet auctions with many traders

We study a multi-unit auction environment similar to eBay. Sellers, each with a single unit of a homogeneous good, set reserve prices at their own second-price auctions. Each buyer has private value for the good and wishes to acquire a single unit. Buyers can bid as often as they like and move between auctions. We characterize a perfect Bayesian equilibrium for this decentralized dynamic mechanism in which, conditional on reserve prices, an efficient set of trades occurs at a uniform price. In a large but finite market, the sellers set reserve prices equal to their true costs under a very mild distributional assumption, so ex post efficiency is achieved. Buyers’ strategies in this equilibrium are simple and do not depend on their beliefs about other buyers’ valuations, or the number of buyers and sellers.     

Community-Based Tradable Permits for Localized Pollution

This paper considers the assignment of tradable permits—representing property rights of an environmental good—to community members who are harmed by pollution generated by firms. These community members can in turn sell permits to polluters according to their personal preferences. For a special case with a sole household, market transactions between the household and polluters achieve an efficient pollution level. However, for a group of households, the decentralized market solution fails to yield social efficiency because of competitive consumption of the environmental goods. We design a revenue-sharing mechanism akin to unitization, under which market transactions also achieve efficient resource allocation. Importantly, in some cases, efficiency can be achieved even when regulators are ignorant of the private valuation of the environmental good.     

On the efficiency of ex ante and ex post pricing institutions

Summary This paper compares the performance of three pricing institutions in a decentralized matching model in which random matching occurs. In the first, sellers make public ex ante commitments to trade at pre-specified prices before matching occurs. In the second, the buyer and seller engage in an alternating offer bargaining game once a match has occurred. In the final pricing institution, one party is chosen at random to make a take it or leave it price offer. The steady state equilibrium with ex ante pricing pareto dominates the steady state equilibrium with ex post take it or leave it offers, which in turn pareto dominates the steady state equilibrium with alternating offers. As the discount factor goes to one, the equilibrium with ex ante pricing generates participation rates that tend toward the pareto efficient level. The ex post pricing institutions generate participation rates that are bounded away from efficient levels. The surplus loss associated with switching from ex ante pricing to take it or leave it offers is small when the discount factor is close to one. Contrary to many models of decentralized trade, ex post pricing institutions encourage too much search by buyers.The financial support of the Social Sciences and Humanities Research Council of Canada is gratefully acknowledged. The research for this paper was completed while the author was visiting the University of California at San Diego. The author thanks Douglas Gale for comments.     

Combinatorial auctions with decreasing marginal utilities

In most of microeconomic theory, consumers are assumed to exhibit decreasing marginal utilities. This paper considers combinatorial auctions among such submodular buyers. The valuations of such buyers are placed within a hierarchy of valuations that exhibit no complementarities, a hierarchy that includes also OR and XOR combinations of singleton valuations, and valuations satisfying the gross substitutes property. Those last valuations are shown to form a zero-measure subset of the submodular valuations that have positive measure. While we show that the allocation problem among submodular valuations is NP-hard, we present an efficient greedy 2-approximation algorithm for this case and generalize it to the case of limited complementarities. No such approximation algorithm exists in a setting allowing for arbitrary complementarities. Some results about strategic aspects of combinatorial auctions among players with decreasing marginal utilities are also presented.