nep-des New Economics Papers
on Economic Design
Issue of 2017‒06‒18
eight papers chosen by
Alex Teytelboym
University of Oxford

  1. Second price all-pay auctions, how much money do players get or lose? By Gisèle Umbhauer
  2. Hard evidence and welfare in adverse selection environments By PRAM, Kym
  3. Cost of transformation: a measure on matchings By Can, Burak; Pourpouneh, Mohsen; Storcken, Ton
  4. Generalized Compensation Principle By Aleh Tsyvinski; Nicolas Werquin
  5. The Digital Privacy Paradox: Small Money, Small Costs, Small Talk By Susan Athey; Christian Catalini; Catherine Tucker
  6. Knowing Me, Imagining You: By Breitmoser, Yves
  7. Aggregation of Bayesian preferences: Unanimity vs Monotonicity By Federica Ceron; Vassili Vergopoulos
  8. Robust Pooling for Contracting Models with Asymmetric Information By Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.

  1. By: Gisèle Umbhauer
    Abstract: The paper studies second price all-pay auctions - wars of attrition - in a new way, based on class room experiments and Kosfeld, Droste and Voorneveld’s (2002) best reply matching equilibrium. Two players fight over a prize of value V, have a budget M, submit bids lower or equal to M; both pay the lowest bid and the prize goes to the highest bidder. The behaviour probability distributions in the class room experiments are strikingly different from the mixed Nash equilibrium. They fit with best reply matching or generalized best reply matching, an ordinal logic according to which, if bid A is the best response to bid B, and if B is played with probability p, then A is also played with probability p. In the mixed Nash equilibrium, the expected payoff is never negative and close to 0. In the best reply and generalized best reply matching equilibria, players may lose money, up to 1/12th of the budget when M is large in comparison to V, but they can also get a lot of money, especially if V is large. The study leads to examine possible bifurcations in the bidding behaviour and gives some insights into how to regulate games to avoid pathological gambling with a huge waste of money.
    Keywords: second price all-pay auction, war of attrition, best reply matching, Nash equilibrium, classroom experiment.
    JEL: C72 D44
    Date: 2017
  2. By: PRAM, Kym
    Abstract: I consider environments in which an agent with private information can acquire arbitrary hard evidence about his type before interacting with a principal. In a broad class of screening models, I show that there is always an evidence structure that interim Pareto improves over the no-evidence benchmark whenever some types of the agent take an outside option in the benchmark case, and additional weak conditions, including either a single-crossing condition or state-independence of the principal's payoffs, are satisfied. I show that the sufficient conditions are tight and broadly applicable. Addressing concerns about multiple equilibria, I show how a planner can restrict the available evidence to ensure that an equilibrium which interim Pareto-improves over the benchmark case is obtained. Furthermore, I show that Pareto-improving evidence can arise endogenously when agents choose what evidence to acquire (and disclose).
    Keywords: Information Economics, Hard Evidence, Mechanism Design, Microeconomic Theory, Insurance.
    Date: 2017
  3. By: Can, Burak (General Economics 1 (Micro)); Pourpouneh, Mohsen (Quantitative Economics); Storcken, Ton (QE / Mathematical economics and game the)
    Abstract: This paper constructs a normative framework to quantify the difference between two matchings in roommate markets. We investigate the “cost of transformation” from one mechanism to another, based on the differences in the outputs of these mechanisms. Several conditions are introduced to ensure this cost reflects the welfare effect of the transformation on individuals. We introduce a measure called the Borda measure, which is fully characterized by these conditions. Several possible applications of this measure under different contexts interpretations are also discussed, such as measuring how unstable, how unfair, or how inefficient a matching is.
    Keywords: matching markets, measure function
    Date: 2017–06–06
  4. By: Aleh Tsyvinski; Nicolas Werquin
    Abstract: We generalize the classic concept of compensating variation and the welfare compensation principle to a general equilibrium environment with distortionary taxes. We show that the problem of designing a tax reform that compensates the welfare gains and losses induced by an economic disruption can be formalized as a solution to a system of differential-algebraic equations (DAEs). We derive its solution in a closed form and therefore provide a complete analytical characterization of the welfare-compensating tax reform in general equilibrium. The partial equilibrium compensation consists of adjusting the average tax rate to exactly cancel out the initial wage disruption. We show that in general equilibrium, the compensating tax reform features three primary modifications to this benchmark. First, defining the relevant wage disruption that needs to be compensated requires accounting for the endogenous wage adjustments induced by the initial shock. The other two effects arise because the marginal tax rates, in general equilibrium, impact wages, and hence individual utility. The “progressivity” effect requires adjustments to the tax code that counteract the welfare effects implied by the decreasing marginal product of each skill's labor. This leads to exponentially decreasing or increasing taxes on incomes below those of the disrupted agents. The “compensation of compensation” effect requires adjustments that counteract the welfare effects implied by the complementarities between skills in production. This leads to an inductive procedure to implement compounding rounds of iterative compensation. While we provide a closed form expression for this effect in the general model, in the special case of a CES production function it reduces to a remarkably simple uniform shift of the marginal tax rates. Finally, we derive a closed form formula for the fiscal surplus of the wage disruption and the compensating tax reform, generalizing the traditional Kaldor-Hicks criterion.
    JEL: H20 H21
    Date: 2017–06
  5. By: Susan Athey; Christian Catalini; Catherine Tucker
    Abstract: 'Notice and Choice' has been a mainstay of policies designed to safeguard consumer privacy. This paper investigates distortions in consumer behavior when faced with notice and choice which may limit the ability of consumers to safeguard their privacy using field experiment data from the MIT digital currency experiment. There are three findings. First, the effect small incentives have on disclosure may explain the privacy paradox: Whereas people say they care about privacy, they are willing to relinquish private data quite easily when incentivized to do so. Second, small navigation costs have a tangible effect on how privacy-protective consumers' choices are, often in sharp contrast with individual stated preferences about privacy. Third, the introduction of irrelevant, but reassuring information about privacy protection makes consumers less likely to avoid surveillance, regardless of their stated preferences towards privacy.
    JEL: C93 D62 D8 K10 O3 O31 O38
    Date: 2017–06
  6. By: Breitmoser, Yves (Humboldt University Berlin)
    Abstract: Overbidding in auctions has been attributed to e.g. risk aversion, loser regret, level-k, and cursedness, relying on varying identifying assumptions. I argue that \"type projection\'\" organizes these findings and largely captures observed behavior. Type projection formally models that people tend to believe others have object values similar to their own - a robust psychological phenomenon that naturally applies to auctions. First, I show that type projection generates the main behavioral phenomena observed in auctions, including increased sense of competition (\"loser regret\") and broken Bayesian updating (\"cursedness\"). Second, re-analyzing data from seven experiments, I show that type projection explains the stylized facts of behavior across private and common value auctions. Third, in a structural analysis relaxing the identifying assumptions made in earlier studies, type projection consistently captures behavior best, in-sample and out-of-sample. The results reconcile bidding patterns across conditions and have implications for behavioral and empirical analyses as well as policy.
    Keywords: auctions; overbidding; projection; risk aversion; cursed equilibrium; depth of reasoning;
    JEL: C72 C91 D44
    Date: 2017–06–06
  7. By: Federica Ceron (Centre d'Economie de la Sorbonne - Paris School of Economics); Vassili Vergopoulos (Centre d'Economie de la Sorbonne - Paris School of Economics)
    Abstract: This article reconsiders the issue of Bayesian aggregation by pointing at a conflict that may arise between two logically independent dominance criteria, Pareto dominance and statewise dominance, that are commonly imposed on social preferences. We propose a weaker dominance axiom that restricts statewise dominance to Pareto dominant alternatives and Pareto dominance to statewise dominant alternatives. The associated aggregation rule is a convex combination of two components., the first being a weighted sum of the individuals' subjective expected utility (SEU) functional, the second being a social SEU functional, with associated social utility function and social belief. Such representation establishes the existence of a trade off between adherence to the Pareto principle and compliance with statewise dominance. We then investigate what are the consequences of adding to our assumptions either of the two dominance criteria in their full force and obtain that each of them is equivalent to discarding the other, unless there is essentially a common prior probability
    Keywords: Pareto dominance; Monotonicity; Preference aggregation; Social choice, Subjective expected utility
    JEL: D71 D81
    Date: 2017–05
  8. By: Kerkkamp, R.B.O.; van den Heuvel, W.; Wagelmans, A.P.M.
    Abstract: We consider principal-agent contracting models between a seller and a buyer with single- dimensional private information. The buyer's type follows a continuous distribution on a bounded interval. We present a new modelling approach where the seller oers a menu of nitely many contracts to the buyer. The approach distinguishes itself from existing methods by pooling the buyer types using a partition. That is, the seller rst chooses the number of contracts oered and then partitions the set of buyer types into subintervals. All types in a subinterval are pooled and oered the same contract by the design of our menu. We call this approach robust pooling and apply it to utility maximisation and cost min- imisation problems. In particular, we analyse two concrete problems from the literature. For both problems we are able to express structural results as a function of a single new parameter, which remarkably does not depend on all instance parameters. We determine the optimal par- tition and the corresponding optimal menu of contracts. This results in new insights into the (sub)optimality of the equidistant partition. For example, the equidistant partition is optimal for a family of instances for one of the problems. Finally, we derive performance guarantees for the equidistant and optimal partitions for a given number of contracts. For the considered problems the robust pooling approach has good performances with only a few contracts.
    Keywords: mechanism design, asymmetric information, robust pooling, optimal partitioning, performance guarantees
    Date: 2017–03–14

This nep-des issue is ©2017 by Alex Teytelboym. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.