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Fees, incentives, and efficiency in large double auctions


Jantschgi, Simon; Nax, Heinrich H; Pradelski, Bary S R; Pycia, Marek (2022). Fees, incentives, and efficiency in large double auctions. Working paper series / Department of Economics 405, University of Zurich.

Abstract

Fees are omnipresent in markets but, with few exceptions, are omitted in economic models—such as Double Auctions—of these markets. Allowing for general fee structures, we show that their impact on incentives and efficiency in large Double Auctions hinges on whether the fees are homogeneous (as, e.g., fixed fees and price fees) or heterogeneous (as, e.g., bid-ask spread fees). Double Auctions with homogeneous fees share the key advantages of Double Auctions without fees: markets with homogeneous fees are asymptotically strategyproof and efficient. We further show that these advantages are preserved even if traders have misspecified beliefs. In contrast, heterogeneous fees lead to complex strategic behavior (price guessing) and may result in severe market failures. Allowing for aggregate uncertainty, we extend these insights to market organizations other than the Double Auction.

Abstract

Fees are omnipresent in markets but, with few exceptions, are omitted in economic models—such as Double Auctions—of these markets. Allowing for general fee structures, we show that their impact on incentives and efficiency in large Double Auctions hinges on whether the fees are homogeneous (as, e.g., fixed fees and price fees) or heterogeneous (as, e.g., bid-ask spread fees). Double Auctions with homogeneous fees share the key advantages of Double Auctions without fees: markets with homogeneous fees are asymptotically strategyproof and efficient. We further show that these advantages are preserved even if traders have misspecified beliefs. In contrast, heterogeneous fees lead to complex strategic behavior (price guessing) and may result in severe market failures. Allowing for aggregate uncertainty, we extend these insights to market organizations other than the Double Auction.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C72, D44, D47, D81, D82
Uncontrolled Keywords:Double auction, fees, transaction costs, incentives, strategyproofness, efficiency, robustness
Language:English
Date:February 2022
Deposited On:25 Feb 2022 09:05
Last Modified:25 Feb 2022 09:06
Series Name:Working paper series / Department of Economics
Number of Pages:60
ISSN:1664-7041
OA Status:Green
Official URL:http://www.econ.uzh.ch/static/wp/econwp405.pdf
Related URLs:https://www.econ.uzh.ch/en/research/workingpapers.html

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