ABSTRACT
This chapter determines the lower bounds for expected surplus extraction efficiency of an idealized double auction populated with budget-constrained zero-intelligence (ZI) traders. The ultimate goal of this effort is to gain insights into the factors responsible for the high efficiency of some markets such as double auctions. The chapter specifies simple environment, trader behavior, and an idealized form of the institution labelled "synchronized" double auction. It examines the sensitivity of this result to the relative proportion of extra-marginal traders using computer simulations. The chapter derives the efficiency results for a "continuously clearing" version of double auction which is a closer approximation of field and laboratory versions of this institution. ZI traders can serve as a powerful tool for analysis and comparison of market institutions because they help isolate the consequences of market structure from the behavior of market participants. The double auction is a robust institution for efficient extraction of consumer and producer surplus in a variety of market environments.
