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On the Trade off Between Deficit and Inefficiency and the Double Auction with a Fixed Transaction Fee

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  • Tymon Tatur

Abstract

In many trading environments, any incentive compatible and individually rational market mechanism will be either inefficient or will run a deficit. We prove that as the market size m gets large, for any fixed surplus (or deficit) x, m times the minimal absolute inefficiency converges to c(x) where c( ⋅ ) is essentially a quadratic function of textitx. We introduce a new mechanism, the double auction with a fixed transaction fee. By choosing the size of the fee appropriately, any level of deficit or surplus can be implemented and the resulting mechanisms achieve the above bound. Copyright The Econometric Society 2005.

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  • Tymon Tatur, 2005. "On the Trade off Between Deficit and Inefficiency and the Double Auction with a Fixed Transaction Fee," Econometrica, Econometric Society, vol. 73(2), pages 517-570, March.
  • Handle: RePEc:ecm:emetrp:v:73:y:2005:i:2:p:517-570
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    File URL: http://hdl.handle.net/10.1111/j.1468-0262.2005.00587.x
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    Cited by:

    1. LiCalzi, Marco & Pellizzari, Paolo, 2007. "Simple market protocols for efficient risk sharing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3568-3590, November.
    2. Shneyerov, Artyom & Wong, Adam Chi Leung, 2010. "Bilateral matching and bargaining with private information," Games and Economic Behavior, Elsevier, vol. 68(2), pages 748-762, March.
    3. Shneyerov, Artyom & Wong, Adam Chi Leung, 2010. "The rate of convergence to perfect competition of matching and bargaining mechanisms," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1164-1187, May.
    4. Muthoo, Abhinay & Mutuswami, Suresh, 2005. "Competition and Efficiency in Markets with Quality Uncertainty," Economics Discussion Papers 9981, University of Essex, Department of Economics.
    5. Drexl, Moritz & Kleiner, Andreas, 2015. "Optimal private good allocation: The case for a balanced budget," Games and Economic Behavior, Elsevier, vol. 94(C), pages 169-181.
    6. Shneyerov, Art & Wong, Adam Chi Leung, 2007. "The Rate of Convergence to Perfect Competition of a Simple Matching and Bargaining Mechanism," Microeconomics.ca working papers shneyerov-07-05-01-03-43-, Vancouver School of Economics, revised 01 May 2007.
    7. Athey, Susan & Miller, David A., 2007. "Efficiency in repeated trade with hidden valuations," Theoretical Economics, Econometric Society, vol. 2(3), September.

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