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On the Trade off Between Deficit and Inefficiency and the Double Auction with a Fixed Transaction Fee
Author(s) -
Tatur Tymon
Publication year - 2005
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.1111/j.1468-0262.2005.00587.x
Subject(s) - inefficiency , double auction , economics , microeconomics , subsidy , impossibility , function (biology) , incentive compatibility , database transaction , incentive , transaction cost , mathematical economics , fixed cost , computer science , common value auction , programming language , evolutionary biology , political science , law , market economy , biology
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. 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.