EFFICIENT ALLOCATION WITH CONTINUOUS QUANTITIES

The inefficiency of allocation mechanisms in the presence of bilateral asymmetric information is reconsidered in an environment with continuous quantities. The result of Myerson and Satterthwaite is proved in this environment under the condition that zero trade is efficient if the highest cost seller (or the lowest value buyer) appears. In addition, if this condition fails, there may exist mechanisms implementing efficient allocations. The problem of "hidden endowments" is considered, where any agent may be either a buyer or seller, depending on the realization of the privately observed information. In this environment, it is often possible to arrange efficient trades. Ex ante asymmetries, rather than interim asymmetries, tend to prevent efficient allocations. © 1991.