If a market is considered to be a social choice function, then the domain of admissible preferences is restricted and standard social choice theorems do not apply. A substantial body of analysis, however, strongly supports the notion that attractive strategy-proof social choice functions do not exist in market settings. Yetprice theory, which implicityly assumes the strategy-proofness of markets, performs quie well in describing many real markets. This paper resolves this paradox in two steps. First, given that a market is not strategy-proof, it should be modeled as a Bayesian game of incomplete information. Second, a double auction market, which is perhaps the simplest operationalization of supply and demand as a Bayesian game, is approximately strategy-proof even when the number of traders on each side of the market is quite moderate.
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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number
1255.
Length: Date of creation: Mar 1999 Date of revision: Handle: RePEc:nwu:cmsems:1255
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Barbera, Salvador & Jackson, Matthew O, 1995.
"Strategy-Proof Exchange,"
Econometrica,
Econometric Society, vol. 63(1), pages 51-87, January.
[Downloadable!] (restricted)
Other versions:
Salvador Barbera & Matthew O. Jackson, 1993.
"Strategy-Proof Exchange,"
Discussion Papers
1021, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
[Downloadable!]