Bilateral Trade with Loss-Averse Agents

Benkert, Jean-Michel (January 2022). Bilateral Trade with Loss-Averse Agents (Working Paper Series 188). University of Zurich UZH 10.2139/ssrn.2579661

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The endowment and attachment effect are empirically well-documented in bilateral trade situations. Yet, the theoretical literature has so far failed to formally identify these effects. We fill this gap by introducing expectations-based loss aversion, which can explain both effects, into the classical setting by Myerson Satterthwaite (1983). This allows us to formally identify the endowment and attachment effect and study their impact on information rents, allowing us to show that, in contrast to other behavioral approaches to the bilateral trade problem, the impossibility of inducing materially efficient trade persists in the presence of loss aversion. We then turn to the design of optimal mechanisms and consider the problem of maximizing the designer’s revenue as well as gains from trade. We find that the designer optimally provides the agents with full insurance in the money dimension and with partial insurance in the trade dimension, thereby reducing ex-post variation in agents’ payoffs.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Benkert, Jean-Michel Nicolas

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

ISSN:

1664-705X

Series:

Working Paper Series

Publisher:

University of Zurich UZH

Language:

English

Submitter:

Jean-Michel Nicolas Benkert

Date Deposited:

04 May 2022 13:09

Last Modified:

05 Dec 2022 16:14

Publisher DOI:

10.2139/ssrn.2579661

JEL Classification:

C78, D01, D82, D84, D90

BORIS DOI:

10.48350/166992

URI:

https://boris.unibe.ch/id/eprint/166992

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