The Social Costs of Side Trading

20 Pages Posted: 2 Aug 2019

See all articles by Andrea Attar

Andrea Attar

Toulouse School of Economics; University of Roma Tor Vergata

Thomas Mariotti

Universite de Toulouse 1 Capitole

Francois Salanie

National Institute for Agricultural Research (INRA); University of Toulouse 1 - Toulouse School of Economics (TSE)

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Date Written: July 2019

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, Second-Best Allocations, Side Trading

JEL Classification: D43, D82, D86

Suggested Citation

Attar, Andrea and Mariotti, Thomas and Salanie, Francois, The Social Costs of Side Trading (July 2019). CEPR Discussion Paper No. DP13872. Available at SSRN: https://ssrn.com/abstract=3428396

Andrea Attar (Contact Author)

Toulouse School of Economics

21, allée de Brienne
Toulouse, F 31000
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University of Roma Tor Vergata ( email )

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00100 Rome
Italy

Thomas Mariotti

Universite de Toulouse 1 Capitole ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042
France

Francois Salanie

National Institute for Agricultural Research (INRA) ( email )

21, Allee de Brienne
31000 Toulouse
France

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

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