Northwestern University - Kellogg School of Management
Steven R. Williams
University of Illinois at Urbana-Champaign - Department of Economics
Konstantinos E. Zachariadis
London School of Economics
July 7, 2014
We investigate equilibrium in the buyer's bid double auction (BBDA) in a model with correlated, interdependent values. Using a combination of theorems and numerical experiments, we establish that simple offset equilibria exist even in small markets. Moreover, we bound traders' strategic behavior as a function of market size and derive rates of convergence to zero of (i) inefficiency in the allocation caused by strategic behavior and (ii) the error in the market price as an estimate of the rational expectations price. These rates together with numerical experiments suggest that strategic behavior is inconsequential even in small markets in its effect on allocational efficiency and information aggregation. The BBDA thus simultaneously accomplishes both the informational and allocational goals that markets ideally fulfill. It does this perfectly for large markets and noisily for small markets, with the noise attributable mainly to the smallness itself and not the strategic behavior of traders.
Number of Pages in PDF File: 80
Keywords: double auction, rational expectations, allocational efficiency, information aggregation, computation of equilibria
JEL Classification: C62, C63, C72, D44, D82, D83
Date posted: July 10, 2014
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