Optimal trading mechanisms with ex ante unidentified traders (Q5937316)

The paper considers the problem of designing a rule to determine the terms of trade among several traders who own some units of a good to be traded and have private information about their valuation of objects. In the paper, it is assumed that any trader may be sated at consumption levels below the economy wide endowment. As a consequence, a trader holding some units of the good that are less than his/her sated consumption level may be either a seller or a buyer depending on the realisation of his/her privately observed information and his/her choice of the trading mechanism. In other words, the role of a trader as a buyer or a seller is endogenously determined by his/her bids but cannot be identified prior to trade. The paper presents first the format structure of the multilateral trading problem, followed by a general characterisation of all incentive, compactible and individually rational mechanisms. The way to construct the trading mechanism that maximises a weighted sum of expected total gains from trade and expected proftit to the market maker is presented then. This optimal mechanism is shown to characterise the ex ante efficient mechanism for some particular weight, and to converge to a bid-ask mechanism when the number of traders in the economy becomes large.