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

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( <formula format="inline"> <simplemath>⋅</simplemath> </formula>) 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. Copyright The Econometric Society 2005.