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Thursday, October 28, 2010

Nobody's perfect: The Myerson-Satterthwaite Theorem

“Nobody’s perfect”, or more specifically, no market is perfect.


That seems intuitive, but it’s actually got a formal elaboration in the Myerson-Satterthwaite theorem.


When we notice that markets or other institutions are inefficient, we need to ask compared to what?  What is the best we could possibly hope for even if we could design markets from scratch?  Myerson and Satterthwaite give the definitive answer:  even the best of all possible market designs must be inefficient:  it must leave some potential gains from trade unrealized.”


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