nep-des New Economics Papers
on Economic Design
Issue of 2017‒10‒15
eight papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Cognitive Ability and Bidding Behavior in Second Price Auctions: An Experimental Study By Ji Yong Lee; Rodolfo M. Nayga, Jr; Cary Deck; Andreas Drichoutis
  2. Inference on Auctions with Weak Assumptions on Information By Vasilis Syrgkanis; Elie Tamer; Juba Ziani
  3. Empirical analysis of scoring auctions for oil and gas leases By Sant'Anna, Marcelo Castello Branco
  4. Auctions and Leaks: A Theoretical and Experimental Investigation Auctions and Leaks: A Theoretical and Experimental Investigation By Sven Fischer; Werner Güth; Todd R. Kaplan; Ro'i Zultan
  5. Markets vs. Mechanisms By Raphael Boleslavsky; Christopher Hennessy; David L. Kelly
  6. Optimal Regulation with Exemptions By Louis Kaplow
  7. Profit-Sharing and Implementation of Efficient Outcomes By Ruben Juarez; Kohei Nitta
  8. Preventing the Tyranny of the Majority - Experimental Evidence on the Choice of Voting Thresholds in Bayesian Games By Engelmann, Dirk; Grüner, Hans Peter; Hoffmann, Timo; Possajennikov, Alex

  1. By: Ji Yong Lee (Department of Agricultural Economics and Agribusiness,, University of Arkansas); Rodolfo M. Nayga, Jr (The National Bureau of Economic Research); Cary Deck (Department of Economics, Finance, and Legal Studies, University of Alabama); Andreas Drichoutis (Department of Agricultural Economics & Rural Development, Agricultural University of Athens)
    Abstract: Behavioral biases are more pronounced for individuals with lower cognitive abilities. This paper examines what connection if any there is between cognitive ability and bidding strategy in second price auctions. Despite truthful revelation being a weakly dominant strategy, previous experiments have consistently observed overbidding, which makes use of such auctions for inferring homegrown value problematic. Examining the effect of cognitive ability is important as it may help identify when one can reliably recover values from bids. The results indicate that more cognitively able subjects behave in closer accordance with theory, and that cognitive ability partially explains heterogeneity in bidding behavior.
    Keywords: Cognitive ability, Second price auction, Bid deviation, Overbidding, Laboratory experiment
    JEL: C91 C92
    Date: 2017
  2. By: Vasilis Syrgkanis; Elie Tamer; Juba Ziani
    Abstract: Given a sample of bids from independent auctions, this paper examines the question of inference on auction fundamentals (e.g. valuation distributions, welfare measures) under weak assumptions on information structure. The question is important as it allows us to learn about the valuation distribution in a robust way, i.e., without assuming that a particular information structure holds across observations. We leverage recent contributions in the robust mechanism design literature that exploit the link between Bayesian Correlated Equilibria and Bayesian Nash Equilibria in incomplete information games to construct an econometrics framework for learning about auction fundamentals using observed data on bids. We showcase our construction of identified sets in private value and common value auctions. Our approach for constructing these sets inherits the computational simplicity of solving for correlated equilibria: checking whether a particular valuation distribution belongs to the identified set is as simple as determining whether a linear program is feasible. A similar linear program can be used to construct the identified set on various welfare measures and counterfactual objects. For inference and to summarize statistical uncertainty, we propose novel finite sample methods using tail inequalities that are used to construct confidence regions on sets. We also highlight methods based on Bayesian bootstrap and subsampling. A set of Monte Carlo experiments show adequate finite sample properties of our inference procedures. We also illustrate our methods using data from OCS auctions.
    Date: 2017–10
  3. By: Sant'Anna, Marcelo Castello Branco
    Abstract: I study a scoring auctions implemented in Brazil to sell oil exploration rights. Differently from most sales of this kind, bidders had to submit a multi-dimensional bid that included a bonus and an exploratory program. A non-linear scoring rule determined the winner. I propose a method to estimate the underlying primitive distribution of tract values and exploration commitment costs. Estimating the distribution of those primitives allows the evaluation of counterfactual revenues in alternative bidding schemes. I find that a first price auction would imply a 9.7% higher revenue from the sales examined.
    Date: 2017–10
  4. By: Sven Fischer (Newcastle University Business School); Werner Güth (LUISS Rome, Frankfurt School of Finance and Management, and Max Planck Institute on Collective Goods Bonn); Todd R. Kaplan (University of Exeter and University of Haifa); Ro'i Zultan (Ben-Gurion University of the Negev)
    Abstract: (Revised Version of JERP 2014-027) In first- and second-price private value auctions with sequential bidding, second movers may discover the first movers' bid. Equilibrium behavior in the first-price auction is mostly unaffected but there are multiple equilibria in the second- price auction. Consequently, comparative statics across price rules are equivocal. Experimentally, leaks in the first-price auction favor second movers but harm first movers and sellers, as theoretically predicted. Low to medium leak probabilities eliminate the usual revenue dominance of first-over second-price auctions. With a high leak probability, second-price auctions generate significantly more revenue.
    Keywords: auction, espionage, collusion,, laboratory experiment
    JEL: C72 C91 D44
    Date: 2017–10–04
  5. By: Raphael Boleslavsky (University of Miami); Christopher Hennessy (London School of Economics); David L. Kelly (University of Miami)
    Abstract: We demonstrate constraints on usage of direct revelation mechanisms (DRMs) by corporations inhabiting economies with securities markets. We consider a corporation seeking to acquire decision relevant information. Posting a standard DRM in an environment with a securities market endogenously increases the outside option of the informed agent. If the informed agent rejects said DRM, then she convinces the market that she is uninformed, and she can trade aggressively sans price impact, generating large (off-equilibrium) trading gains. Due to this endogenous outside option effect, using a DRM to screen out uninformed agents may be impossible. Even when screening is possible, refraining from posting a mechanism and instead relying on markets for information is optimal if the endogenous change in outside option value is sufficiently large. Finally, even if posting a DRM dominates relying on markets, outcomes are improved by introducing a search friction, which randomly limits the agent’s ability to observe the DRM, forcing the firm to sometimes rely on markets for information.
    Keywords: Market Microstructure, Mechanism Design Publication Status: Submitted
    JEL: G32 L14 D83
    Date: 2017–09–28
  6. By: Louis Kaplow
    Abstract: Despite decades of research on mechanism design and on many practical aspects of cost-benefit analysis, one of the most basic and ubiquitous features of regulation as actually implemented throughout the world has received little theoretical attention: exemptions for small firms. These firms may generate a disproportionate share of harm due to their being exempt and because exemption induces additional harmful activity to be channeled their way. This article analyzes optimal regulation with exemptions where firms have different productivities that are unobservable to the regulator, regulated and unregulated output each cause harm although at different levels, and the regulatory regime affects entry as well as the output choices of regulated and unregulated firms. In many settings, optimal schemes involve subtle effects and have counterintuitive features: for example, higher regulatory costs need not favor higher exemptions, and the incentives of firms to drop output to become exempt can be too weak as well as too strong. A final section examines the optimal use of output taxation alongside regulation, which illustrates the contrast with the mechanism design approach that analyzes the optimal use of instruments of a type that are not in widespread use.
    JEL: D61 D62 H23 J88 K20 K23 K32 K42 L51 Q58
    Date: 2017–09
  7. By: Ruben Juarez (Department of Economics, University of Hawaii); Kohei Nitta (Department of Economics, Toyo University)
    Abstract: Agents are endowed with time that is invested in different projects that generate profit depending on the allocation of time by the agents. A mechanism divides the profit generated by the projects among agents depending on the allocation of time as well as the amount of profit that every project generates. We study mechanisms that incentivize agents to contribute their time to the level that generates the maximal aggregate profit at the Nash equilibrium regardless of the production functions (efficiency). Our main result is the characterization of all the mechanisms that satisfy efficiency. Furthermore, within this class, a narrow class of mechanisms are monotone in the payoffs of the agents with respect to the addition of agents, time or projects.
    Keywords: Profit-sharing, Efficiency, Implementation.
    JEL: C72 D44 D71 D82
    Date: 2017–05
  8. By: Engelmann, Dirk; Grüner, Hans Peter; Hoffmann, Timo; Possajennikov, Alex
    Abstract: In democracies, an absolute majority of the population may choose policies that are harmful to the rest of the population. A purpose of super-majority rules is to prevent this from happening. We study whether individuals optimally choose sub- or super-majority rules when the rights of minorities should be protected. Subjects propose more extreme voting rules for more skewed distributions, but we also find that rule choices are biased towards balanced rules, leading substantial welfare losses.
    JEL: C91
    Date: 2017

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