nep-des New Economics Papers
on Economic Design
Issue of 2017‒09‒10
thirteen papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. An Invitation to Market Design By Scott Kominers; Alexander Teytelboym; Vincent Crawford
  2. All-pay auctions with affiliated values. By Chi, Chang Koo; Murto, Pauli; Välimäki, Juuso
  3. Collusion Detection in Public Procurement with Limited Information By Bedri Kamil Onur Tas
  4. Axiomatic and bargaining foundations of an allocation rule for ordered tree TU-games By Sylvain Béal; Sylvain Ferrières; Eric Rémila; Phillippe Solal
  5. A Generalization of the Harsanyi NTU Value to Games with Incomplete Information By Andrés Salamanca
  6. Optimal Licensing of Technology in the Face of (Asymmetric) Competition By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  7. Self-Allocation in Contests By Bernergård, Axel; Wärneryd, Karl
  8. Contests as selection mechanisms: The impact of risk aversion By March, Christoph; Sahm, Marco
  9. Stability, Fairness and Random Walks in the Bargaining Problem By Jakob Kapeller; Stefan Steinerberger
  10. Market design for a high-renewables European electricity system By Newbery, D.; Pollitt, M.; Ritz, R.; Strielkowski, W.
  11. A system operator's utility function for the frequency response market By Greve, T.; Teng, F.; Pollitt, M.; Strbac, G.
  12. What future(s) for liberalized electricity markets: efficient, equitable or innovative? By Newbery, D.
  13. Market Power in the Capacity Market? The Case of Ireland By Teirila, J.

  1. By: Scott Kominers (Harvard Business School); Alexander Teytelboym (Institute for New Economic Thinking at the Oxford Martin School, University of Oxford); Vincent Crawford (Oxford University)
    Abstract: Market design seeks to translate economic theory and analysis into practical solutions to real-world problems. By redesigning both the rules that guide market transactions and the infrastructure that enables those transactions to take place, market designers can address a broad range of market failures. In this paper, we illustrate the process and power of market design through three examples: the design of medical residency matching programs; a scrip system to allocate food donations to food banks; and the recent “Incentive Auction” that reallocated wireless spectrum from television broadcasters to telecoms. Our lead examples show how effective market design can encourage participation, reduce gaming, and aggregate information, in order to improve liquidity, efficiency, and equity in markets. We also discuss a number of fruitful applications of market design in other areas of economic and public policy.
    Keywords: matching, auctions, trading, scrip, liquidity, Efficiency, equity, allocation rules, marketplaces, market design
    JEL: C78 D44 D82 D02 D51 D71 D61 D62 D63
    Date: 2017–09
  2. By: Chi, Chang Koo (Dept. of Economics, Norwegian School of Economics and Business Administration); Murto, Pauli (Aalto University School of Business); Välimäki, Juuso (Aalto University School of Business)
    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; common values; affiliated signals
    JEL: D44 D82
    Date: 2017–06–17
  3. By: Bedri Kamil Onur Tas (TOBB University of Economics and Technology)
    Abstract: Public procurement data sets usually lack detailed data that are needed to implement existing methods. We design a method to identify and test for bid rigging in procurement auctions with limited information. The method can be applied to limited data sets using standard econometric tools and software. We implement the methodology to a unique data set about all Turkish public procurement auctions in years 2005-2012, numbering 565,297. We uncover the structure of collusive behavior in Turkish public procurement auctions. We find that collusion significantly increases procurement costs and decreases procurement efficiency.
    Date: 2017–10–08
  4. By: Sylvain Béal (Université de Bourgogne Franche-Comté, CRESE); Sylvain Ferrières (Université de Bourgogne Franche-Comté, CRESE); Eric Rémila (Université de Saint-Etienne, Gate); Phillippe Solal (Université de Saint-Etienne, Gate)
    Abstract: We introduce the class of tree TU-games augmented by a total order over the links which re ects the formation process of the tree. We rst characterize a new allocation rule for this class of cooperative games by means of three axioms, Standardness, Top-consistency and Link Amalgamation. Then, we provide a bargaining foundation for this allocation rule by designing a mechanism, including a bidding stage followed by a bargaining stage, which supports this allocation rule in subgame Nash equilibrium provided that the underlying game is superadditive.
    Keywords: Amalgamation, Bargaining, Consistency, Tree TU-games, Total order
    Date: 2017–07
  5. By: Andrés Salamanca (TSE - Toulouse School of Economics - Toulouse School of Economics)
    Abstract: In this paper, we introduce a solution concept generalizing the Harsanyi non-transferable utility (NTU) value to cooperative games with incomplete information. The so-defined H-solution is characterized by virtual utility scales that extend the Harsanyi-Shapley fictitious weighted-utility transfer procedure. We construct a three-player cooperative game in which Myerson's [Cooperative games with incomplete information. Int. J. Game Theory, 13, 1984, pp. 69-96] generalization of the Shapley NTU value does not capture some "negative" externality generated by the adverse selection. However, when we explicitly compute the H-solution in this game, it turns out that it prescribes a more intuitive outcome taking into account the informational externality mentioned above.
    Keywords: incomplete information,virtual utility,Cooperative games
    Date: 2016–02–01
  6. By: Cuihong Fan (Shanghai University of Finance and Economics); Byoung Heon Jun (Department of Economics, Korea University, Seoul, Republic of Korea); Elmar G. Wolfstetter (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: We reconsider the optimal licensing of technology by an incumbent firm in the presence of multiple potential licensees. In a first step we show that competition among potential licensees has a drastic effect on optimal two-part tariff contracts. We then introduce more general mechanisms and design a dynamic mechanism that extracts the maximum industry profit while reducing the potential licensees' payoff to the minimum level that they can assure themselves. That mechanism can be viewed as a generalized "chutzpah" mechanism, generalized because it employs royalties to maximize the industry profit. It awards licenses to all firms and prescribes maximum permitted royalty rates plus positive fixed fees.
    Keywords: Patent licensing, innovation, optimal contracts, dynamic mechanisms.
    JEL: D21 D43 D44 D45
    Date: 2017
  7. By: Bernergård, Axel (Department of Social Sciences); Wärneryd, Karl (Dept. of Economics)
    Abstract: We consider contestants who must choose exactly one contest, out of several, to participate in. We show that when the contest technology is of a certain type, or when the number of contestants is large, a self-allocation equilibrium, i.e., one where no contestant would wish to change his choice of contest, results in the allocation of players to contests that maximizes aggregate equilibrium effort. For a class of oligopoly models that are equivalent to contests, this implies output maximization.
    Keywords: Contests; self-allocation; effort maximization; quantity competition.
    JEL: C72 D43 D44 D72 D74 L13
    Date: 2017–08–27
  8. By: March, Christoph; Sahm, Marco
    Abstract: We investigate how individual risk preferences affect the likelihood of selecting the more able contestant within a two-player Tullock contest. Our theoretical model yields two main predictions: First, an increase in the risk aversion of a player worsens her odds unless she already has a sufficiently large advantage. Second, if the prize money is sufficiently large, a less able but less risk averse contestant can achieve an equal or even higher probability of winning than a more able but more risk averse opponent. In a laboratory experiment we confirm both, the non-monotonic impact and the compensating effect of risk aversion on winning probabilities. Our results suggest a novel explanation for the gender gap and the optimality of limited monetary incentives in selection contests.
    Keywords: Selection Contest,Risk Aversion,Competitive Balance,Gender Gap
    JEL: C72 D72 J31 K41 M51 M52
    Date: 2017
  9. By: Jakob Kapeller (Institute for Comprehensive Analysis of the Economy, Johannes Kepler University Linz, Austria); Stefan Steinerberger (Department of Mathematics, Yale University, US)
    Abstract: We study the classical bargaining problem and its two canonical solutions, (Nash and Kalai-Smorodinsky), from a novel point of view: we ask for stability of the solution if both players are able distort the underlying bargaining process by reference to a third party (e.g. a court). By exploring the simplest case, where decisions of the third party are made randomly we obtain a stable solution, where players do not have any incentive to refer to such a third party. While neither the Nash nor the Kalai-Smorodinsky solution are able to ensure stability in case reference to a third party is possible, we found that the Kalai-Smorodinsky solution seems to always dominate the stable allocation which constitutes novel support in favor of the latter.
    Date: 2017–08
  10. By: Newbery, D.; Pollitt, M.; Ritz, R.; Strielkowski, W.
    Abstract: This paper presents a set of policy recommendations for the market design of a future European electricity system characterized by a dominant share of intermittent renewable energy supply (RES), in line with the stated targets of European governments. We discuss the market failures that need to be addressed to accommodate RES in liberalized electricity markets, review the evolution of the EU's RES policy mechanisms, and summarize the key market impacts of RES to date. We then set out economic principles for market design and use these to develop our policy recommendations. Our analysis covers the value of interconnection and market integration, electricity storage, the design of RES support mechanisms, distributed generation and network tariffs, the pricing of electricity and flexibility as well as long-term contracting and risk management.
    Keywords: Electricity markets, wholesale market design, renewable energy, interconnection, electricity storage, long-term contracts, capacity markets
    JEL: H23 L94 Q28 Q48
    Date: 2017–07–16
  11. By: Greve, T.; Teng, F.; Pollitt, M.; Strbac, G.
    Abstract: How can the electricity system operator determine the optimal quantity and quality of electricity ancillary services (such as frequency response) to procure in a market increasingly characterized by intermittent renewable electricity generation? The paper presents a system operator's utility function to calculate the exchange rates in monetary values between different frequency response products in the electricity system. We then use the utility function in a two-sided Vickrey-Clarke-Groves (VCG) mechanism combined of two frequency response products 'enhanced and primary' in the context of the system in Great Britain. This mechanism would allow the market to reveal to the system operator the welfare optimal mix of speed of frequency response and quantity to procure. We show that this mechanism is the efficient way to support new faster sources of frequency response, such as could be provided by grid scale batteries.
    Keywords: Utility function, ancillary services, system operator, energy storage, VCG mechanism
    JEL: D44 L94
    Date: 2017–07–10
  12. By: Newbery, D.
    Abstract: Well-designed electricity liberalization has delivered efficiency gains, but political risks of decarbonizing the sector have undermined investment incentives in energy-only markets, while poorly designed regulated tariffs have increased the cost of accommodating renewables. The paper sets out principles from theory and public economics to guide market design, capacity remuneration, renewables support and regulatory tariff setting, illustrating their application in a hypothetical high capital cost low variable cost electricity system in "Andia" that resembles Peru. Such characteristics are likely to become more prevalent with increasing renewables penetration, where poor regulation is already threatening current utility business models. The appendix develops and applies a method for determining the subsidy justified by learning spillovers from solar PV.
    Keywords: Electricity market design, tariffs, renewables support, utilities
    JEL: D44 L51 L94 Q40 Q48 Q51
    Date: 2017–03–17
  13. By: Teirila, J.
    Abstract: An electricity market coupled with a capacity market is modelled as a two-stage game that allows for strategic behaviour both in the electricity market and in the capacity market. The model is applied to the Irish electricity market, where a capacity market based on reliability options is established by the end of 2017. As Ireland has one dominant firm in the electricity market, there have been concerns that the new market design provides it an opportunity to abuse market power in these two markets. Using Ireland as an example this article examines the kinds of strategic behaviours that can be expected if a capacity market is implemented in an imperfectly competitive market. It is found that the potential for the abuse of market power in the capacity market is significant for the dominant firm in Ireland and that there is no simple way to mitigate it. The relative amount of procured capacity, the amount and characteristics of potential entrants, and the competitiveness of the electricity market are the main determinants of the possibilities and incentives for abusing market power in the capacity market.
    Keywords: capacity market, strategic behaviour, competitive benchmark analysis, procurement auction
    JEL: D43 D44 H57 L13 L94
    Date: 2017–06–30

This nep-des issue is ©2017 by Guillaume Haeringer and 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.
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