The Economics of Sequential Exchange

Benito Arruñada (Universitat Pompeu Fabra)
Giorgio Zanarone (CUNEF)
Nuno Garoupa (Texas A&M University)

Abstract: We analyze the sequential exchange problem in which traders have incomplete information on whether their current transaction is in conflict with some previous transaction. We show that if property rights over the assets being traded are strictly enforced against subsequent buyers, potentially efficient trades may fail even if information on all other attributes of the current transaction is complete. We also show that first best trade may be implemented through mechanisms providing public evidence on previous transactions, and we provide sufficient conditions for implementing such mechanisms. We discuss implications of our model for the conceptualization and optimal design of property rights, market institutions, and the theory of the firm.