Bilateral trade with loss-averse agents

Arbeitspapier

We study the bilateral trade problem put forward by Myerson and Satterthwaite (1983) under the assumption that agents are loss-averse, using the model developed by Koszegi and Rabin (2006, 2007). We show that the endowment effect increases the sellers information rent, and that the attachment effect reduces the buyer's information rent. Further, depending on the distribution of types, loss-aversion can reduce the severity of the impossibility problem. However, the result cannot be reversed. Turning to the design of optimal mechanisms, we show that in both revenue and welfare maximizing mechanisms the designer optimally provides the agents with full insurance in the money dimension and with partial insurance in the trade dimension. In fact, when the stakes are large, loss-aversion can eliminate trade altogether. We show that all results display robustness to the exact specification of the reference point and provide some results on general mechanism design problems.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 188

Classification and Topics

• Classification: Wirtschaft ; Bargaining Theory; Matching Theory ; Institutions: Design, Formation, Operations, and Impact ; Asymmetric and Private Information; Mechanism Design ; Expectations; Speculations
• Subject: Bilateral trade ; loss-aversion ; mechanism design

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Benkert, Jean-Michel
• Event: Veröffentlichung
• (who): University of Zurich, Department of Economics
• (where): Zurich
• (when): 2016

Further information

• DOI: doi:10.5167/uzh-109940
• Handle: http://hdl.handle.net/10419/162412
• Last update: 10.03.2025, 11:46 AM CET