Econometrica: Mar, 2005, Volume 73, Issue 2

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

https://doi.org/10.1111/j.1468-0262.2005.00587.x
p. 517-570

Tymon Tatur

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 gets large, for any fixed surplus (or deficit) , times the minimal absolute inefficiency converges to () where () 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.