Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/219496 
Year of Publication: 
2019
Series/Report no.: 
EconPol Working Paper No. 34
Publisher: 
ifo Institute - Leibniz Institute for Economic Research at the University of Munich, Munich
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.
Document Type: 
Working Paper

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