Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/266508 
Year of Publication: 
2022
Series/Report no.: 
Discussion Papers No. 22-03
Publisher: 
University of Bern, Department of Economics, Bern
Abstract: 
The endowment and attachment effect are empirically well-documented in bilateral trade situations. Yet, the theoretical literature has so far failed to formally identify these effects. We ftll this gap by introducing expectations-based loss aversion, which can explain both effects, into the classical setting by Myerson and Satterthwaite (1983). This allows us to formally identify the endowment and attachment effect and study their impact on information rents, allowing us to show that, in contrast to other behavioral approaches to the bilateral trade problem, the impossibility of inducing materially e cient trade persists in the presence of loss aversion. We then turn to the design of optimal mechanisms and consider the problem of maximizing the designer's revenue as well as gains from trade. We ftnd that the designer optimally provides the agents with full insurance in the money dimension and, depending on the distribution of types, optimally increases or decreases the trade frequency in the presence of loss aversion.
Subjects: 
Bilateral trade
loss aversion
mechanism design
endowment and attachment effect
JEL: 
C78
D01
D02
D82
D84
D90
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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