The Efficiency-Incentive Tradeoff in Double Auction Environments

We consider the tradeoff between efficiency and incentives in large double auction environments with weak budget balance. No mechanism simultaneously gives agents perfect incentives to be truthful and ensures first-best efficiency, but a planner designing a mechanism may be willing to compromise on either of these dimensions for improvements along the other. She would then naturally wish to find where the possibility frontier lies with respect to incentives and efficiency. We make inroads on this question: our main result locates the frontier to within a factor that is logarithmic in the size of the market. Thanks to (in random order) Alessandro Bonatti, Xiao Yu Wang, Ruitian Lang, Glenn Ellison, Parag Pathak, Rakesh Vohra, and Juuso Toikka for helpful comments and advice.