Cover of EconPol Working Paper 34

The Social Costs of Side Trading

Andrea Attar, Thomas Mariotti, François Salanié (EconPol Europe; Toulouse School of Economics)

This working paper examines 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. Authors Andrea Attar, Thomas Mariotti and François Salanié (EconPol Europe and Toulouse School of Economics) discuss the relevance of the results for insurance and financial markets.

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 effciency and robustness to side trading are in general irreconcilable requirements. Second, there actually exists only one 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.

Citation

Andrea Attar, Thomas Mariotti, François Salanié: The Social Costs of Side Trading, EconPol Working Paper 34, November 2019