Robust trading mechanisms with budget surplus and partial trade

Abstract

In a bilateral bargaining problem with private values, Hagerty and Rogerson (J Econ Theory 42(1):94–107, 1987) showed that essentially all dominant strategy incentive compatible, ex post individually rational, and budget balanced mechanisms are posted-price mechanisms, where a price is drawn from a distribution, and trade occurs if both players benefit from trading at this price. In this paper, we demonstrate a feasible bargaining mechanism that yields more ex ante gains from trade than any posted-price (budget balanced) mechanism.