Subsidy Schemes in Double Auctions

88 Pages Posted: 2 Oct 2020 Last revised: 15 Dec 2020

See all articles by Daniel Chen

Daniel Chen

Graduate School of Business, Stanford University

Anthony Lee Zhang

University of Chicago - Booth School of Business

Date Written: August 14, 2020

Abstract

We study uniform-price double auctions augmented with a class of subsidy schemes. Using these subsidies, any profile of linear demand schedules can be implemented as an equilibrium outcome. By revenue equivalence, all other mechanisms which implement linear auction equilibria are essentially equivalent to some subsidy scheme in our class. We show that, under a linear dependency condition on primitives, fully efficient, budget balanced, and individually rational trade is possible. Thus, the welfare loss from equilibria in uniform-price auctions without subsidies is a non-fundamental distortion, which can be fixed with better mechanism design. However, we show that monopolist trading platforms have incentives to reduce allocative efficiency to increase revenue, even as the number of traders becomes large.

Keywords: double auction, price impact, allocative efficiency

JEL Classification: D44, D82, G14

Suggested Citation

Chen, Daniel and Zhang, Anthony Lee, Subsidy Schemes in Double Auctions (August 14, 2020). Available at SSRN: https://ssrn.com/abstract=3668394 or http://dx.doi.org/10.2139/ssrn.3668394

Daniel Chen

Graduate School of Business, Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Anthony Lee Zhang (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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