Efficient Allocations in Double Auction Markets

This paper proposes a simple descriptive model of discrete-time double auction markets for divisible assets. As in the classical models exchange economies, we consider finite set agents described by their initial endowments and preferences. Instead Walrasian-type market models, however, assume that all trades take place centralized where communicate through sealed limit orders buying selling. We find that, under nonstrategic bidding, clears with zero precisely when agents’ current holdings are on Pareto frontier. More interestingly, auctions implement Adam Smith’s “invisible hand” sense starting from disequilibrium, repeated lead to sequence allocations converges individually rational allocations.