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

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...

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Veröffentlicht in:Econometrica 2005-03, Vol.73 (2), p.517-570
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description 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 x. 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. Corollaries include: an asymptotic version of the Myerson-Satterthwaite Impossibility Theorem; a description of the minimal subsidy required to implement the efficient trading rule; a characterization of the minimal inefficiency obtainable with budget-balanced market mechanisms; recommendations on the optimal organization of trade; and insights on the effects of taxation.
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source JSTOR Mathematics & Statistics; Access via Wiley Online Library; JSTOR Archive Collection A-Z Listing
subjects Allocative efficiency
Applications
Asymmetric information
asymptotic efficiency
Auctions
Budget allocation
Deadweight loss
Econometrics
Efficient markets
Exact sciences and technology
Fees
Insurance, economics, finance
large markets
Market
Market mechanisms
Market size
Mathematics
Myerson-Satterthwaite Theorem
Probability and statistics
Revenue
Sciences and techniques of general use
Statistics
Taxes
Trade-off
Vickrey-Clarke-Groves mechanism
title On the Trade off Between Deficit and Inefficiency and the Double Auction with a Fixed Transaction Fee
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