RESILIENT ALLOCATION RULES FOR BILATERAL TRADE

In decision problems where agents hold private information, an uninformed central planner may be unable to identify Pareto improvements that each agent himself could identify. We examine allocation rules in a simple bilateral bargaining problem which are ''resilient'' in the sense that no improvements could be both identified and collectively achieved when the traders themselves can bargain over the mechanism. Specifically, recursively resilient rules are status quo, sequential equilibrium outcomes of any finite game of offers and counter-offers of alternative mechanisms. These rules can survive regardless of the order in which the traders speak. The main result gives a simple characterization of recursively resilient rules shoeing that interim efficient rules are recursively resilient, but there is a nonnull set of interim inefficient, recursively resilent rules as well. Since certain allocation rules can only result when one or the other trader ''speaks first,'' recursively resilient rules are a natural choice for a planner who does not possess the precise details of the negotiation process between the traders. (C) Academic Press, Inc.