nep-des New Economics Papers
on Economic Design
Issue of 2017‒08‒27
four papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. All-Pay Auctions with Affiliated Values By Chi, Chang Koo; Murto, Pauli; Valimaki, Juuso
  2. Dynamic Mechanism Design: Dynamic Arrivals and Changing Values By Garrett, Daniel F.
  3. A Complete Characterization of Equilibria in a Common Agency Screening Game By Martimort, David; Semenov, Aggey; Stole, Lars
  4. The economics of distributed ledger technology for securities settlement By Benos, Evangelos; Garratt, Rodney; Gurrola-Perez, Pedro

  1. By: Chi, Chang Koo; Murto, Pauli; Valimaki, Juuso
    Abstract: This paper analyzes all-pay auctions where the bidders have affiliated values for the object for sale and where the signals take binary values. Since signals are correlated, high signals indicate a high degree of competition in the auction and since even losing bidders must pay their bid, non-monotonic equilibria arise. We show that the game has a unique symmetric equilibrium, and that whenever the equilibrium is non-monotonic the contestants earn no rents. All-pay auctions result in low expected rents to the bidders, but also induce inefficient allocations in models with affiliated private values. With two bidders, the effect on rent extraction dominates, and all-pay auction outperforms standard auctions in terms of expected revenue. With many bidders, this revenue ranking is reversed for some parameter values and the inefficient allocations persist even in large auctions.
    Keywords: All-Pay Auctions, Affiliated Signals, Common Values
    JEL: D44 D82
    Date: 2017–06–17
  2. By: Garrett, Daniel F.
    Abstract: We study the optimal mechanism in a dynamic sales relationship where the buyerís arrival date is uncertain, and where his value changes stochastically over time. The buyerís arrival date is the Örst date at which contracting is feasible and is his private information. To induce immediate participation, the buyer is granted positive expected rents even if his value at arrival is the lowest possible. The buyer is punished for arriving late; i.e., he expects to earn less of the surplus. Optimal allocations for a late arriver are also further distorted below Örst-best levels. Conditions are provided under which allocations converge to the e¢ cient ones long enough after contracting, and this convergence occurs irrespective of the time the contract is initially agreed (put di§erently, the so-called "principle of vanishing distortions" introduced by Battaglini (2005) continues to apply irrespective of the buyerís arrival date).
    Keywords: dynamic mechanism design;dynamic arrivals;stochastic process
    JEL: D82
    Date: 2017–06
  3. By: Martimort, David; Semenov, Aggey; Stole, Lars
    Abstract: We characterize the complete set of equilibrium allocations to an intrinsic common agency screening game as the set of solutions to self-generating optimization programs. We provide a complete characterization of equilibrium outcomes for regular environments by relying on techniques developed elsewhere for aggregate games and for the mechanism design delegation literature. The set of equilibria include those with non-differentiable payoffs and discontinuous choices, as well as equilibria that are smooth and continuous in types. We identify one equilibrium, the maximal equilibrium, which is the unique solution to a self-generating optimization program with the largest (or “maximal”) domain, and the only equilibrium that is supported with bi-conjugate (i.e., least-concave) tariffs. The maximal equilibrium exhibits a n-fold distortion caused by each of the n principal’s non-cooperative behavior in over- harvesting the agent’s information rent. Furthermore, in any equilibrium, over any interval of types in which there is full separation, the agent’s equilibrium action corresponds to the allocation in the maximal equilibrium. Under mild conditions, the maximal equilibrium maximizes the agent’s information rent within the class of equilibrium allocations. When the principals’ most-preferred equilibrium allocation differs from the maximal equilibrium, we demonstrate that the agent’s choice function exhibits an interval of bunching over the worst agent types, and elsewhere corresponds with the maximal allocation. The optimal region of bunching trades off the principals’ desire to constrain inefficient n-fold marginalizations of the agent’s rent against the inefficiency of pooling agent types.
    Keywords: Intrinsic common agency, aggregate games, mechanism design for delegated decision-making, duality, equilibrium selection.
    JEL: D82 D86
    Date: 2017–08–16
  4. By: Benos, Evangelos (Bank of England); Garratt, Rodney (University of California Santa Barbara); Gurrola-Perez, Pedro (Bank of England)
    Abstract: Distributed ledger technology (DLT) is a database architecture which enables the keeping and sharing of records in a distributed and decentralized way, while ensuring its integrity through the use of consensus-based validation protocols and cryptographic signatures. In principle, DLT has the potential to reduce costs and increase the efficiency of securities settlement, the ultimate step of every security transaction. In this paper, we first examine to what extent DLT could add value and change securities settlement. We then characterize the innovation process in the post-trade industry and finally, we describe the economics of a hypothetical DLT-based security settlement industry. Our main conclusions are that: i) DLT has the potential to improve efficiency and reduce costs in securities settlement, but the technology is still evolving and it is uncertain at this point what form, if any, a DLT-based solution for securities settlement will ultimately take, ii) technological innovation in the post-trade industry is more likely to achieve its potential with some degree of co-ordination which could be facilitated by the relevant authorities, and iii) if DLT-based securities settlement becomes a reality, then it is likely to be concentrated among few providers which, in the absence of regulation, could result in inefficient monopoly pricing or efficient price discrimination with service providers capturing much of the market surplus.
    Keywords: Distributed ledger; securities settlement; CSD; post-trade industry
    JEL: G23 L81 O32
    Date: 2017–08–18

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