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Research Details

Strategy-proofness and Markets, Social Choice and Welfare

Abstract

If a market is considered to be a social choice function, then the domain of admissible preferences is restricted and standard social choice theorems do not apply. A substantial body of analysis, however, strongly supports the notion that attractive strategy-proof social choice functions do not exist in market settings. Yet price theory, which implicitly assumes the strategy-proofness of markets, performs quite well in describing many real markets. This paper resolves this paradox in two steps. First, given that a market is not strategy-proof, it should be modeled as a Bayesian game of incomplete information. Second, a double auction market, which is perhaps the simplest operationalization of supply and demand as a Bayesian game, is approximately strategy-proof even when the number of traders on each side of the market is quite moderate.

Type

Article

Author(s)

Mark Satterthwaite

Date Published

2001

Citations

Satterthwaite, Mark. 2001. Strategy-proofness and Markets. Social Choice and Welfare. 18(1): 37-58.

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