Working Paper: CEPR ID: DP13872
Authors: Thomas Mariotti; Andrea Attar; François Salanié
Abstract: We study resource allocation under private information when the planner cannot prevent bilateral side trading between consumers and firms. Adverse selection and side trading severely restrict feasible trades: each marginal quantity must be fairly priced given the consumer types who purchase it. The resulting social costs are twofold. First, second-best efficiency and robustness to side trading are in general irreconcilable requirements. Second, there actually exists a unique budget-feasible allocation robust to side trading, which deprives the planner from any capacity to redistribute resources between different types of consumers. We discuss the relevance of our results for insurance and financial markets.
Keywords: Adverse Selection; Side Trading; Second-best Allocations
JEL Codes: D43; D82; D86
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adverse selection and side trading (D82) | Restrictions on feasible trades (F14) |
| Lack of monitoring by the planner (E61) | Inefficiencies in resource allocation (D61) |
| Inability to monitor trades (G14) | Impact on welfare outcomes (I38) |
| Side trading (F19) | Diminished capacity to redistribute resources (D30) |
| Inability to monitor trades (G14) | Structure of market equilibria (D53) |
| Social costs of side trading (F16) | Moving away from second-best efficiency (D61) |
| Social costs of side trading (F16) | Preventing redistribution among different consumer types (D39) |