Discussion paper

DP18188 Efficient Bilateral Trade

Can two parties reach an ex-post Pareto efficient trade agreement? The importance of the question was elucidated by Coase (1960), and Myerson and Satterthwaite (1983) provided a commonly accepted negative answer that such agreement is impossible when the parties are privately informed. We show that this negative answer depends on the assumption of quasi-linear preferences: efficient trade is possible if risk- aversion or wealth effects are sufficiently large or if agents’ utility is not too responsive to private information. Under empirically-grounded specifications of risk aversion and elasticity of trade, two parties can trade efficiently despite substantial asymmetry of information.


Garratt, R and M Pycia (2023), ‘DP18188 Efficient Bilateral Trade‘, CEPR Discussion Paper No. 18188. CEPR Press, Paris & London. https://cepr.org/publications/dp18188