Bilateral Trade and Partnership with Loss Averse Agents

Abstract

This thesis consists of three essays on bilateral trading and partnership with loss averse agents. All the three essays consider the same model where two loss averse agents (Tversky and Kahneman (1991), K ̈oszegi and Rabin (2006)) hold some shares of an asset and now want to dissolve the partnership. The first chapter shows the impossibility result for loss averse agents i.e. there does not exist a feasible, incentive compatible and individually rational mechanism which can implement an efficient outcome. The second chapter talks about the dissolution mechanism intermediated by a broker which is optimum in a sense different from ex-post efficiency. Set of all optimal mechanisms are characterised for the bilateral trade as well as partner- ship model. The third chapter shows non-existence of a dissolution mechanism which is incentive-compatible, interim individually rational, budget-balanced and efficient for equal share partnership when the degree of loss aversion exceeds a cut off, which is in contrast to Cramton et al. (1987) result