Re-trading and Efficient Allocation

Abstract

Inefficient allocations are prevalent in Markov-perfect equilibria (MPE) of dynamic matching and bargaining games even as friction vanishes. I argue the collection of inefficiency results is associated with the omission of repeated intermediation in the literature. In response, this paper studies a simple heterogeneous market with a finite number of players, where each player can re-trade as many times as they want, and exit the market at any time. I show that, for small search cost, all MPE are allocative efficient. The reasoning is conceptually distinct from the existing literature, and indispensable to analyzing models where players are allowed to exit the market amidst the game.

Keywords: Bargaining, re-trading, markov-perfect equilibrium, matching markets, allocative efficiency

JEL Classification: C72, C78, D5