Working paper

The Social Costs of Side Trading

Andrea Attar, Thomas Mariotti, and 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: Oligopoly and Other Forms of Market Imperfection
  • D82: Asymmetric and Private Information • Mechanism Design
  • D86: Economics of Contract: Theory

Reference

Andrea Attar, Thomas Mariotti, and François Salanié, The Social Costs of Side Trading, TSE Working Paper, n. 19-1017, June 2019.

See also

Published in

TSE Working Paper, n. 19-1017, June 2019