The Social Costs of Side Trading

This working paper examines resource allocation under private information when the planner cannot prevent bilateral side trading between consumers and firms. Adverse selection and side trading severely restrict feasible trades: each marginal quantity must be fairly priced given the consumer types who purchase it. Authors Andrea Attar, Thomas Mariotti and François Salanié (EconPol Europe and Toulouse School of Economics) discuss the relevance of the results for insurance and financial markets.