Abstract

A Dutch 'folk theorem' holds that 'from exchange it comes to tears'. This seems to contradict the basic idea found in economics that exchange and trade can make both sides better off. We show that the 'folk theorem' has a better theoretical foundation than sometimes thought, as it is vindicated by the equilibrium of an exchange game with two-sided asymmetric information. We, then, explain the practical value of such 'folk wisdom' in the real world by showing why players might be unlikely to learn such an equilibrium strategy.