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Efficient allocations in double auction markets

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Document pages: 24 pages

Abstract: This paper proposes a simple descriptive model of discrete-time doubleauction markets for divisible assets. As in the classical models of exchangeeconomies, we consider a finite set of agents described by their initialendowments and preferences. Instead of the classical Walrasian-type marketmodels, however, we assume that all trades take place in a centralized doubleauction where the agents communicate through sealed limit orders for buying andselling. We find that, under nonstrategic bidding, the double auction clearswith zero trades precisely when the agents current holdings are on the Paretofrontier. More interestingly, the double auctions implement Adam Smith s "invisible hand " in the sense that, when starting from disequilibrium, repeateddouble auctions lead to a sequence of allocations that converges toindividually rational Pareto allocations.

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