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The Optimal Design of a Market

Author

Listed:
  • Matthew O. Jackson
  • Sandro Brusco
Abstract
We study the optimal design of the rules of trade in a two-period market given that agents arrive at different times and may only trade with agents present contemporaneously. First period agents face a fixed cot of trading across periods, and their decisions of whether or not to trade in the second period result in externalities relative to the agents arriving in the second period. Given the non-convexities associated with the fixed cost, competitve trading rules can result in inefficienceis in such a market and, in fact, anonymity must be sacrificed to achieve efficiency. Efficient trading rules have a market maker (i.e., an agent who is given some market power and the right to trade across periods) who faces some competition within period trading, but not across periods. The efficient choice of who should be market maker can be made by auctionaing rights to this position. If there is uncertainty across periods, then efficient mechanisms may involve multiple market makers, and the optimal number of market makers depends on the cost of trading, level of risk aversion, and presence of scymmetric information.

Suggested Citation

  • Matthew O. Jackson & Sandro Brusco, 1997. "The Optimal Design of a Market," Discussion Papers 1186, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1186
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    References listed on IDEAS

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    20. Gehrig, Thomas & Jackson, Matthew, 1998. "Bid-ask spreads with indirect competition among specialists," Journal of Financial Markets, Elsevier, vol. 1(1), pages 89-119, April.
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    Cited by:

    1. Gehrig, Thomas & Jackson, Matthew, 1998. "Bid-ask spreads with indirect competition among specialists," Journal of Financial Markets, Elsevier, vol. 1(1), pages 89-119, April.
    2. Comerton-Forde, Carole & Rydge, James, 2006. "The current state of Asia-Pacific stock exchanges: A critical review of market design," Pacific-Basin Finance Journal, Elsevier, vol. 14(1), pages 1-32, January.
    3. Yaron Leitner, 2009. "Inducing agents to report hidden trades: a theory of an intermediary," Working Papers 09-10, Federal Reserve Bank of Philadelphia.
    4. Yaron Leitner, 2003. "Non-exclusive contracts, collateralized trade, and a theory of an exchange," Working Papers 03-3, Federal Reserve Bank of Philadelphia.
    5. Deneckere,R. & Peck,J., 1998. "Demand uncertainty, endogenous timing and costly waiting : jumping the gun in competitive markets," Working papers 22, Wisconsin Madison - Social Systems.
    6. Yaron Leitner, 2004. "Non-Exclusive Contracts, Collateralized Trade, and a Theory of an Exchange," Econometric Society 2004 North American Winter Meetings 397, Econometric Society.
    7. Huang, Jennifer & Wang, Jiang, 2010. "Market liquidity, asset prices, and welfare," Journal of Financial Economics, Elsevier, vol. 95(1), pages 107-127, January.
    8. Matthew O. Jackson & Thomas R. Palfrey, 1998. "Efficiency and Voluntary Implementation in Markets with Repeated Pairwise Bargaining," Econometrica, Econometric Society, vol. 66(6), pages 1353-1388, November.
    9. Matthew O. Jackson, 2001. "A crash course in implementation theory," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 18(4), pages 655-708.
    10. Yaron Leitner, 2005. "A theory of an intermediary with nonexclusive contracting," Working Papers 05-12, Federal Reserve Bank of Philadelphia.
    11. Yaron Leitner, 2010. "Inducing agents to report hidden trades: a theory of an intermediary," Working Papers 10-28, Federal Reserve Bank of Philadelphia.
    12. Jan-Peter Siedlarek, 2012. "Intermediation in Networks," Working Papers 2012.42, Fondazione Eni Enrico Mattei.

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    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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