The No-Trade Theorem and Misgovernment

 There is a in financial economics a theorem that goes like this:

Suppose that 1) markets are in an efficient equilibrium, 2) there are no idiot ("noise") traders, and 3) the structure of possessing private information is common knowledge. If that were true then there would be no trades whatsoever.

To quote Wikipedia:

The idea behind the proof of the no-trade theorem is that if there is common knowledge about the structure of a market, then any bid or offer (i.e. attempt to initiate a trade) will reveal the bidder's private knowledge and will be incorporated into market prices even before anyone accepts the bid or offer, so no profit will result. Another way to put it is: all the traders in the market are rational, and thus they know that all the prices are rational/efficient; therefore, anyone who makes an offer to them must have special knowledge, else why would they be making the offer? Accepting the offer would make them a loser. All the traders will reason the same way, and thus will not accept any offers.

Now since we know damn well that asset trading happens a lot we know that this isn't true in general. Further for  any trade to occur either 1) some or all of the assumptions of the theorem must be false for a trade to occur or 2) the parties have to have different risk or liquidity preferences.

Which naturally leads me to parking meters.

In 2009 Chicago leased the cities parking meters (and associated revenue stream) to a private company for a large cash payment. A transaction itself isn't of a remarkable sort -  exchanging streams of payments for lump sums is the most basic kind of finance there is.

What is remarkable is that it obviously never make any sense for the city. If both parties have the same liquidity preferences (risk is negligible here) then by the no-trade theorem the transaction shouldn't have taken place. If the meters were worth more than the asking price, then the city would be better off holding onto them, if they were worth less the company wouldn't buy, and if the values were equal then the city is no better off - but since transactions aren't totally cost-less, there would be no trade then either. Same sort of logic as the no-trade theorem.

Of course, its possible that the city has different liquidity preferences than the buying firm. But this seems unlikely, given that the city preferred more liquidity, since they can issue bonds, access the money market, and have fairly predictable expenses and revenues. Its possible that the city could be considered to have a lower discount rate than the buyer, but that a (responsible) government would be more present-oriented than a private firm seems implausible.

So given that the sale happened, which of theorem's assumptions were violated?

There's no market here to be efficient, but we're just valuing a stream of payments which is a trivial problem. How about the structure of information? Again, knowledge about the value of this asset is symmetrical, and both parties know it.

The best case scenario here is that the city was indifferent between buying and selling at the sale price. If you believe that, do you have a toll bridge for sale?

So what we're left with is 2 (plausible) explanations: an idiot trader or a government that's incredibly shortsighted.

Either way, the lesson here is to assume any sale of public revenue streams that has a buyer is be a bad deal until proven otherwise.