efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

individually rational budget balanced mechanisms and allocation of surplus abstract we investigate the issue of implementation via individually rational ex post budget balanced bayesian mechanisms we show that all decision rules generating a nonnegative expected social surplus are implementable via such mechanisms if and only if the probability distribution of the agents type profiles satisfies two conditions the well known condition of cremer and mclean 1988 full extraction of the surplus in bayesian and dominant strategy auctions econometrica 56 1247 1257 and the identifiability condition introduced in this paper we also show that these conditions are necessary for ex post efficiency to be attainable with budget balance and individual rationality and that the expected social surplus in these mechanisms can be distributed in any desirable way lastly we demonstrate that like cremer mclean condition the identifiability condition is generic if there are at least three agents

optimality versus practicality in market design a comparison of two double auctions we consider a market for indivisible items with m buyers and m sellers traders privately know their values costs which are statistically dependent two mechanisms are considered the buyer s bid double auction collects bids and asks from traders and determines the allocation by selecting a market clearing price it fails to achieve all possible gains from trade because of strategic bidding the designed mechanism is a revelation mechanism in which honest reporting of values costs is incentive compatible and all gains from trade are achieved this optimality however comes at the expense of plausibility i the monetary transfers among the traders are defined in terms of the traders beliefs about each other s value cost ii a trader may suffer a loss ex post iii the mechanism may run a surplus deficit ex post we compare the virtues of the simple yet mildly inefficient buyer s bid double auction to the flawed yet perfectly efficient designed mechanism

pollution claim settlements under private information abstract the classical problem of resolving a nuisance dispute between a pollution generating firm and nearby residents is modelled here as a mechanism design problem we assume that the designer of the mechanism is the firm that it is uncertain about the actual losses suffered by residents and that the initial assignment of property rights is one where each resident is entitled to prevail we derive a profitmaximizing scheme under the individual rationality and incentive compatibility constraints and examine its properties it is shown that the outcomes it yields are sometimes inefficient moreover when many residents are affected by pollution and the degree of uncertainty with respect to the losses they suffer is large these inefficiencies become rampant

balanced bayesian mechanisms in the transferable utility case a number of authors have identified conditions on beliefs that guarantee the existence of bayesian incentive compatible mechanisms with balanced transfers we present a new easy to interpret condition and we show that it is strictly more general than all the other conditions found in the literature we also study conditions guaranteeing the bayesian implementability of all social decision rules with balanced budget mechanisms

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

the reset inflation puzzle and the heterogeneity in price stickiness new keynesian models have been criticised on the grounds that they require implausibly large price shocks to explain inflation bils et al 2012 show that while these shocks are needed to reduce the excessive inflation persistence generated by the models they give rise to unrealistically volatile reset price inflation this paper shows that introducing heterogeneity in price stickiness in the models overcomes these criticisms directed at them the incorporation of heterogeneity in price stickiness reduces the need for large price shocks with smaller price shocks the new model comes close to matching the data on reset inflation

does us monetary policy respond to oil and food prices a common view is that us monetary policy does not respond to changes in volatile energy and food prices despite this view the popular new keynesian models assume taylor type rules under which the short term interest rates react to headline inflation this paper evaluates the fit of alternative taylor rules within an estimated new keynesian model a main finding is that the us central bank includes energy and food prices in its policy rule although the weight assigned to these prices is much smaller than their share in the economy

mechanism design with interdependent valuations efficiency ggagents valuations are interdependent if they depend on the signals or types of all agents under the implicit assumption that agents cannot observe their outcome decision payoffs previous literature has shown that with interdependent valuations and independent signals efficient design is impossible this paper shows that an efficient mechanism exists in an environment where first the final outcome e g allocation of the goods is determined then the agents observe their own outcome decision payoffs and then final transfers are made

truthful equilibria in dynamic bayesian games this paper characterizes an equilibrium payoff subset for markovian games with private information as discounting vanishes monitoring might be imperfect transitions depend on actions types correlated or not values private or interdependent it focuses on equilibria in which players report their information truthfully this characterization generalizes those for repeated games and reduces to a collection of one shot bayesian games with transfers with independent private values the restriction to truthful equilibria is shown to be without loss except for individual rationality in the case of correlated types results from static mechanism design can be applied resulting in a folk theorem

ex post renegotiation proof mechanism design we study what kind of equilibria of which mechanisms are ex post renegotiation proof eprp i e robust against the possibility of ex post renegotiation under a variety of renegotiation procedures and which social choice functions are eprp implementable in complete information environments with two agents only budget balanced groves allocations are eprp implementable while with three or more agents all ex post efficient allocations are in environments with independent private values essentially only the budget balanced groves in expectations allocations are eprp implementable while with three or more agents and correlated beliefs all ex post efficient allocations are

correlated types and bayesian incentive compatible mechanisms with budget balance abstract this note presents a condition which guarantees the existence of a bayesian incentive compatible mechanism with budget balance when agents have quasi linear utility functions this condition requires correlation among agents private signals types and is 1 simple and easy to verify 2 good for any decision rule whether efficient or not 3 valid even if agents types are mutually payoff relevant and 4 true for almost every probability distribution of agents types journal of economic literatureclassification numbers c72 d82

ex ante efficient ex post individually rational trade abstract consider a bilateral trade model with two sided incomplete information for a general set of independent beliefs an ex post individually rational mechanism generating the same level of ex ante expected gains from trade as an ex ante efficient interim individually rational mechanism is constructed thus imposing the stronger notion of ex post individual rationality on this mechanism design problem generates no loss of efficiency

correlated information and mechanism design in models of asymmetric information possession of private information leads to rents for the possessors this induces mechanism designers to distort away from efficiency the authors show that this is an artifact of the presumption that information is independently distributed rent extraction in a large class of mechanism design games is analyzed and a necessary and sufficient condition for arbitrarily small rents to private information is provided additionally the two person bargaining game is shown to have an efficient solution under first order stochastic dominance and a hazard rate condition similar conditions allow full rent extraction in milgrom weber auctions

auction design with endogenously correlated buyer types abstract this paper studies optimal auction design when the seller can affect the buyers valuations through an unobservable ex ante investment the key insight is that the optimal mechanism may have the seller play a mixed investment strategy so as to create correlation between the buyers otherwise conditionally independent valuations assuming that the seller announces the mechanism before investing the paper establishes conditions on the investment technology so that a mechanism exists which leaves buyers no information rent and leaves the seller indifferent between his investments under these conditions the seller can in fact extract the first best surplus almost fully

technology sourcing versus technology exploitation an analysis of us foreign direct investment flows the traditional paradigm of foreign direct investment fdi suggests that fdi is undertaken principally to exploit some firm specific advantage in a foreign country which provides a locational advantage to the investor however recent theoretical work suggests a model of fdi in which the motivation is not to exploit existing technological advantages in a foreign country but to access such technology and transfer it from the host economy to the investing multinational corporation via spillover effects this paper tests the technology sourcing versus technology exploiting hypotheses for a panel of sectoral fdi flows between the united states and major oecd nations over a 15 year period the research makes use of patel and vega s research policy 28 145 55 1999 taxonomy of sectors which are likely a priori to exhibit technology sourcing and exploiting behaviour respectively while there is evidence that fdi flows into the united states are attracted to r and d intensive sectors very little support is found for the technology sourcing hypothesis either for inward or outward fdi flows the results suggest that in aggregate firm specific ownership effects remain powerful determinants of fdi flows

incentives and the existence of pareto optimal revelation mechanisms abstract from the characterization of strongly and bayesian incentive compatible paretooptimal mechanisms with transferable utilities we derive the following results if there are only two types per individual then a strongly incentive compatible paretooptimal mechanism exists if there are only two individuals with more than three types then there are sets of beliefs open in the class of all beliefs for which no bayesian incentive compatible pareto optimal mechanism exists if there are more than two individuals then the class of beliefs for which such mechanisms exist is open and dense in the class of all beliefs

on public good provision mechanisms with dominant strategies and balanced budget abstract consider a mechanism for the binary public good provision problem that is dominant strategy incentive compatible dsic ex post individually rational epir and ex post budget balanced epbb it is well known that if there are only two agents then any such mechanism must have a threshold or fixed cost sharing form providing the public good if and only if both agents have values that are at least their respective thresholds when there are more than two agents there are mechanisms that are dsic epir and epbb that are not of the threshold form any dsic epir and epbb mechanism that additionally satisfies that the lowest types expect zero net utility from participating are again of the threshold form this additional condition arises endogenously when maximizing expected welfare subject to dsic epir and epbb

the relevance of private information in mechanism design abstract recent results in mechanism design show that as long as agents have correlated private information and are sufficiently risk neutral it is possible to design mechanisms that leave agents with arbitrarily small information rents we show that these full rent extraction results hinge on the implicit assumption that the agents beliefs uniquely determine their preferences we present an example of the voluntary provision of a public good in which this assumption is relaxed and consequently even in highly correlated environments if agents beliefs do not uniquely determine their preferences then the extraction of the agents entire information rents is impossible

informational size and incentive compatibility with aggregate uncertainty in mclean and postlewaite econometrica 56 1992 p 2421 we analyzed pure exchange economies with asymmetrically informed agents we defined a notion of informational size and showed that when the aggregate information of all agents resolves nearly all the uncertainty regarding the state of nature the conflict between incentive compatibility and ex post efficiency can be made small if agents have sufficiently small informational size this paper investigates the relationship between informational size and efficiency for the case in which nontrivial aggregate uncertainty is present i e when significant uncertainty about the world persists even when the information of all agents is known

asymmetric information bargaining problems with many agents a yes or no decision must be made about some issue all agents must agree the coase theorem asserts that the efficient outcome will always result suppose the value positive or negative that an individual attaches to an affirmative decision is privately known to that individual it is proved under very mild conditions that with independent types as the number of agents increases the probability of an affirmative efficient decision goes to zero an example in which it is common knowledge that an affirmative decision is efficient and yet the probability of such a decision goes to zero is given

public goods participation constraints and democracy a possibility theorem abstract it is well known that ex post efficient mechanisms for the provision of indivisible public goods are not interim individually rational however the corresponding literature assumes that agents who veto a mechanism can enforce a situation in which the public good is never provided this paper instead considers majority voting with uniform cost sharing as the relevant status quo efficient mechanisms may then exist which also satisfy all agents interim participation constraints in this case ex post inefficient voting mechanisms can be replaced by efficient ones without reducing any individual s expected utility intuitively agents with a low willingness to pay have to contribute more under majority rule than under an efficient mechanism with a balanced budget although this possibility theorem is not universal in the sense of schweizer 2006 an asymptotic possibility is obtained for certain type distributions

efficiency in partnerships we provide the necessary and sufficient condition for a partnership to be able to sustain efficiency when the output is stochastic when limited liability is imposed we show that only the level of the average liability of the partnership is important the individual levels of liability are irrelevant however the allocation of the total liability among the partners is crucial when additional conditions such as neutrality or individual rationality are imposed

incentive compatible mechanisms with full transferability abstract we consider the bayesian collective choice problem with side payment we introduce the regularity condition which describes the case that agents have mutually correlated private information under the regularity condition we construct a transfer rule with budget balancing which together with the efficient public decision rule is incentive compatible truth telling may be a unique iteratively undominated strategy profile in our direct mechanism

informational size and efficient auctions we develop an auction model for the case of interdependent values and multidimensional signals in which agents signals are correlated we provide conditions under which a modification of the vickrey auction which includes payments to the bidders will result in an ex post efficient outcome furthermore we provide a definition of informational size such that the necessary payments to bidders will be arbitrarily small if agents are sufficiently informationally small the efficiency of market processes has been a central concern in economics since its inception auction mechanisms constitute a very important class of market processes yet the analysis of auctions has typically focused on their revenue generating properties rather than their efficiency properties this is partly due to the fact that for many of the problems typically studied efficiency is trivial when bidders have private values a standard vickrey auction guarantees that the object will be sold to the buyer with the highest value for the object in the case of pure common values that is when all buyers have the same value for the object any outcome that with probability one assigns the object to some bidder will be efficient the intermediate case in which bidders values are not identical but may depend on other bidders signals is more problematic when bidders values are interdependent in this way any single bidder s value may depend on the information of other agents and hence he may not even know his own value it is not clear what it would mean for an agent to bid his true value even before we ask if it is optimal for him to do so several papers have studied efficient auctions with interdependent values and independent types 1 while this is a natural place to begin the independence assumption is not compelling for many problems a prototypical problem is one in which an object is to be sold and individual bidders have private information about the object say the quantity or quality of oil in a tract to be sold that affects other agents values for the object when bidders types include information about objective characteristics of the object being sold their types will typically not be independent when agents types are statistically dependent we show that there exist efficient auction mechanisms for interdependent value auction problems that are essentially vickrey auctions augmented by payments to not from the agents most importantly we link the

full extraction of the surplus in bayesian and dominant strategy auctions we consider auctions for a single indivisible object in the case where the bidders have information about each other which is not available to the seller we show that the seller can use this information to his own benefit and we completely characterize the environ ments in which a well chosen auction gives him the same expected payoff as that obtainable were he able to sell the object with full information about each bidder s willingness to pay we provide this characterization for auctions in which the bidders have dominant strate gies and for those where the relevant equilibrium concept is bayesian nash in both set ups the existence of these auctions hinges on the possibility of constructing lotteries with the correct properties we consider the situation in which an agent the seller possesses one indivisible unit of a good to which he attaches no value but the good has value to a number of potential buyers and its transfer to one of them would increase social welfare in particular the transfer to the buyer with the highest valuation maximizes social welfare in this paper we completely characterize environments in which the seller can design an auction that will enable him to capture for himself the full increase in social welfare induced by the transfer of the good to the bidder with the highest willingness to pay if the seller had full information about the reservation prices of potential buyers his optimal selling strategy would be very simple he would announce a price equal or very close to the highest reservation value the optimal strategy for the bidder with the highest evaluation would be to accept the offer note that we are treating a situation in which the seller can commit himself to a price as a result of the exchange the utility of the seller increases by the full amount of the increase in social welfare and he has been able to fully extract the surplus in many circumstances however a seller has only imperfect knowledge of the buyers willingnesses to pay in this case he must find some mechanism or auction which will enable him to maximize his benefit from the sale of the object the auction literature starts with this observation and shows how the seller can by an astute choice of auction extract the largest possible fraction of the surplus in general the literature has shown that this proportion is strictly less than one in some circumstances the bidders will have information about each other which is not available to the seller for instance in auctions for petroleum drilling rights bidders know the results of geological tests which they have

informational size and incentive compatibility we examine a general equilibrium model with asymmetrically informed agents the presence of asymmetric information generally presents a conflict between incentive com patibility and pareto efficiency we present a notion of informational size and show that the conflict between incentive compatibility and efficiency can be made arbitrarily small if agents are of sufficiently small informational size the incompatibility of pareto efficiency and incentive compatibility is a central theme in economics and game theory the issues associated with this incompatibility are particularly important in the design of resource allocation mechanisms in the presence of asymmetrically informed agents where the need to acquire information from agents in order to compute efficient outcomes and the incentives agents have to misrepresent that information for personal gain come into conflict despite a large literature that focuses on these issues there has been little work aimed at understanding those situations in which informational asymmetries are quantitatively important virtually every transaction is characterized by some asymmetry of information any investor who buys or sells a share of stock generally knows something rel evant to the value of the share that is not known to the person on the other side of the transaction in order to focus on more salient aspects of the problem many models rightly ignore the incentive problems associated with informa tional asymmetries in the belief that for the problem at hand agents are infor mationally small however few researchers have investigated the circumstances under which an analysis that ignores these incentive problems will yield results similar to those obtained when these problems are fully accounted for in this paper we study a class of mechanism design problems our goal is to formalize informational size in a way that when agents are informationally small 1 early versions of this paper circulated under the titles informational smallness and pareto effi ciency and informational smallness and incentive compatibility we thank jacques cremer dean foster andreu mas colell stephen morris david schmeidler and particularly faruk gul for help ful conversations and rajiv vohra for a very careful reading we also thank the numerous partici pants in seminars at which this paper was presented for helpful comments we also thank an editor and the referees for very helpful comments and thank ichiro obara for pointing out an error in an earlier version postlewaite gratefully acknowledges support from the national science foundation