On Efficient Partnership Dissolution under Ex Post Individual Rationality

Stefano Galavotti
Department of Decision Mathematics, University of Florence

Nozomu Muto
Graduate School of Economics, Hitotsubashi University


Daisuke Oyama
Graduate School of Economics, Hitotsubashi University

This paper studies ex post individually rational, efficient partnership dissolution in a setting with interdependent valuations. We derive a sufficient condition that ensures the existence of an efficient dissolution mechanism that satisfies Bayesian incentive compatibility, ex post budget balancedness, and ex post individual rationality. For equal-share partnerships, we show that our sufficient condition is satisfied for any symmetric type distribution whenever the interdependence in valuations is non-positive. This result improves former existence results, demonstrating that the stronger requirement of ex post individual rationality does not always rule out efficiency. We also show that if we allow for two-stage revelation mechanisms, in which agents report their realized payoffs from the allocation, as well as imposing penalties off the equilibrium path, efficient dissolution is always possible even when the interdependence is positive. We further discuss the possibility of efficient dissolution with ex post quitting rights. Journal of Economic Literature Classification Numbers: D02, D40, D44, D82, C72.
Key Words: mechanism design; efficient trade; ex post individual rationality; Groves mechanism; quitting right; interdependent valuation.

Economic Theory 78 (2011), 87-123.
First draft: December 31, 2008; this version: January 13, 2010. PDF file
(Older version: March 24, 2009. PDF file)