When Less Information is Good for E¢ ciency: Private Information in Bilateral Trade and in Markets

We consider a simple bilateral trading game between a seller and a buyer who have private valuations for an indivisible good. The seller makes a price o¤er which the buyer can either accept or reject. If the seller can observe the valuation of the buyer (if information is symmetric), then the trading outcome is trivially e¢ cient. If the seller can not observe the valuation (if information is asymmetric), then the outcome must be ine¢ cient, as is known from the Myerson-Satterthwaite Impossibility Theorem. We embed this bilateral trading game between a single buyer and a single seller into a matching market with a continuum of traders. We show that in this market the relation between information and e¢ ciency is reversed. In particular, if information is symmetric, trading in the market is, in fact, ine¢ cient. JEL Classi…cations: C78, D82, D83 Keywords: Dynamic Matching and Bargaining Games, Decentralized Markets, Consumer Privacy, Search Frictions, Asymmetric Information. University of Michigan, Department of Economics, [email protected]. This paper is based on the …rst chapter of my thesis and I would like to thank my supervisor Georg Noldeke for encouragement and helpful critique. I received valuable advice and comments from many other economist, including Yusufcan Masatlioglu, Gabor Virag, and Art Shneyerov. Financial support by the Deutsche Forschungs Gemeinschaftschaft through SFB/TR 15 and through the GRK 629 is gratefully acknowledged.