A risk neutral seller and buyer with private information bargain over an indivisible item. We prove that optimal robust bilateral trade mechanisms are payoff equivalent to non-wasteful randomized posted prices.
We explore theoretically and experimentally the general equilibrium price and allocation implications of delegated portfolio management when the investor–manager relationship is nonexclusive. Our theory predicts that competition forces managers to promise portfolios that mimic Arrow–Debreu (AD) securities, which investors then combine to fit their preferences. A weak version of the capital asset pricing model (CAPM) obtains, where state prices (relative to state probabilities) implicit in prices of traded securities will be inversely ranked to aggregate wealth across states. Our experiment broadly corroborates the price and choice predictions of the theory. However, price quality deteriorates when only a few managers attract most of the available wealth. Wealth concentration increases because funds flow toward managers who offer portfolios closer to replicating AD securities (as in the theory), but also because funds flow to managers who had better performance in the immediate past (an observation unrelated to the theory). This paper was accepted by Jerome Detemple, finance.
We consider bilateral trade problems subject to incomplete information on the reservation values of the agents. We address negotiations where the communication of proposals takes place through the filter of a third party, a mediator: traders submit proposals over continuous time to the mediator that receives bids and keeps them secret until they are compatible. A regular robust equilibrium (RRE) is an (undominated) ex post equilibrium where (with sufficient delay) all compatible traders reach agreement. We present a characterization of RRE for risk-neutral traders that discount the future at the same exponential rate. We show how to compute RRE strategy profiles, and we explicitly display the unique one where agreements split the net surplus in equal shares. Our results support the claim that bargaining through a mediator is an effective procedure to promote efficiency. (JEL: C78, D02, D74, D82) (c) 2008 by the European Economic Association.