Trade among moral agents with information asymmetries

TL;DR

This paper models trade between moral agents with asymmetric information, showing that morality can ensure efficiency and fairness in socially desirable exchanges, but not in socially undesirable ones, unlike altruism.

Contribution

It introduces a model of trading with Kantian morality behind a Veil of Ignorance, analyzing its effects on efficiency and fairness under asymmetric information.

Findings

Morality guarantees full efficiency in socially desirable trades.

High moral standards are needed for efficiency when quality is uncertain.

Moral concerns promote equal treatment of agents.

Abstract

Two agents trade an item in a simultaneous offer setting, where the exchange takes place if and only if the buyer's bid price weakly exceeds the seller's ask price. Each agent is randomly assigned the buyer or seller role. Both agents are characterized by a certain degree of Kantian morality, whereby they pick their bidding strategy behind a Veil of Ignorance, taking into account how the outcome would be affected if their trading partner adopted their strategy. I consider two variants with asymmetric information, respectively allowing buyers to have private information about their valuation or sellers to be privately informed about the item's quality. I show that when all trades are socially desirable, even the slightest degree of morality guarantees that the outcome is fully efficient. In turn, when quality is uncertain and some exchanges are socially undesirable, full efficiency is only achieved with sufficiently high moral standards. Moral concerns also ensure equal ex-ante treatment of the two agents in equilibrium. Finally, I show that if agents are altruistic rather than moral, inefficiencies persist even with a substantial degree of altruism.