Generic efficiency and collusion-proofness in exchange economies

Abstract.

The purpose of this paper is to study the kind of efficient allocations that can be achieved in exchange economies with asymmetric information, by means of a decentralized mechanism robust to coalitional, strategic deviations. To this end, we define a new strategic equilibrium concept – called strong collusion-proof contract – designed to characterize stable communication agreements in games with differential information against non-binding, self-enforcing and incentive compatible deviations by coalitions. We then construct a strategic market mechanism which, for quasi-linear economies, is such that its strong collusion-proof contracts generically induce the incentive compatible interim efficient allocations. Moreover, we show that these allocations can be achieved by strong collusion-proof contracts. We show that the internally consistent extension of the strong collusion-proof contracts generically yields the same set of efficient allocations.