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  5. Generalized Double Auctions: Maximizing Welfare Guarantees in Bilateral Trade

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Generalized Double Auctions: Maximizing Welfare Guarantees in Bilateral Trade

  • Wanchang Zhang
American Economic Review (Forthcoming)

Abstract

This paper studies robust mechanism design in bilateral trade under limited information. I introduce a new class of mechanisms in which the buyer and seller submit a bid and an ask, and trade occurs when the bid–ask difference exceeds a random spread drawn from a publicly known distribution. Conditional on trade, the asset is sold at the midpoint price, and each trader pays the same commission, which depends on the bid–ask difference through a function determined by the random spread distribution. I show that these mechanisms, termed generalized double auctions, are strategy-proof and include both welfare-guarantee-maximizing and profit-guarantee-maximizing mechanisms.

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