Research

Bilateral Bargaining Design

This paper reexamines the relation between the Myerson-Satterthwaite theorem and the Coase theorem in bilateral trade with private information. It argues that the inefficiency identified by the Myerson-Satterthwaite theorem does not stem from private information per se, but from a deterministic allocation rule that centralizes authority over surplus division. Such centralization generates a strategic externality that underlies the impossibility result.

The paper constructs a mechanism that separates information communication from surplus determination by conveying derived information while preserving decentralized price negotiation. The mechanism achieves incentive compatibility without outside subsidies and implements ex post efficient meeting assignments. The analysis reconciles Coasean bargaining with private information and expands the domain of mechanism design to institutional environments with decentralized authority and probabilistic indeterminacy within a Bayesian framework.