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- Title
What makes markets allocationally efficient?
- Authors
Gode, Dhananjay K.; Sunder, Shyam
- Abstract
The article explores various aspects related to the allocative efficiency of markets. Allocative efficiency is the ratio of the actual to the potential gains from trade, which are equal to the sum of Marshallian consumer and producer surplus. Market researchers are particularly interested in how market rules influence interaction among market participants and thereby affect efficiency. The authors in the article provides a simple explanation for these complex phenomena by showing how externally observable rules that define a market cause high allocative efficiency when individuals remain within the confines of these rules. They also show how the often-ignored shape of extra marginal demand and supply affects efficiency by influencing the inverse relationship between the magnitude of efficiency loss and its probability. It has been shown that high efficiency of double auctions is largely due to the rules that account for most of the efficiency. Their approach differs from game theory, empirical studies, experiments with human traders, and mimicking human traders by computers. A mathematical model has been used instead of field data to control demand, supply, and market rules.
- Subjects
EFFICIENT market theory; BUSINESS research; NEOCLASSICAL school of economics; AUCTIONS; MATHEMATICAL models; CAPITAL market; SUPPLY &; demand; DECISION theory
- Publication
Quarterly Journal of Economics, 1997, Vol 112, Issue 2, p602
- ISSN
0033-5533
- Publication type
Article
- DOI
10.1162/003355397555307