Working Paper: CEPR ID: DP18188
Authors: Rod Garratt; Marek Pycia
Abstract: Can two parties reach an ex-post Pareto efficient trade agreement? The importance of the question was elucidated by Coase (1960), and Myerson and Satterthwaite (1983) provided a commonly accepted negative answer that such agreement is impossible when the parties are privately informed. We show that this negative answer depends on the assumption of quasi-linear preferences: efficient trade is possible if risk- aversion or wealth effects are sufficiently large or if agents’ utility is not too responsive to private information. Under empirically-grounded specifications of risk aversion and elasticity of trade, two parties can trade efficiently despite substantial asymmetry of information.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| quasilinear preferences (D11) | impossibility of ex-post Pareto efficient trade (D61) |
| risk aversion or wealth effects (D11) | efficient trade possible (F12) |
| agents' utility not excessively responsive to private information (D82) | efficient trade possible (F12) |
| degree of information asymmetry (D82) | feasibility of achieving efficient trade agreements (F13) |
| Bayesian incentive-compatible mechanism (D82) | efficient trade outcomes (F10) |
| asymmetries of information (D82) | role of risk aversion in facilitating trade (D81) |
| empirical estimates of risk aversion and elasticity of substitution (D11) | efficient trade (F19) |