nep-des New Economics Papers
on Economic Design
Issue of 2017‒10‒22
seven papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Efficient Kidney Exchange with Dichotomous Preferences By Yao Cheng; Zaifu Yang
  2. Procurement with Unforeseen Contingencies By Herweg, Fabian; Schmidt, Klaus
  3. Ethical Voting in Multicandidate Elections By Laurent Bouton; Benjamin G. Ogden
  4. Democracy and compliance in public goods games By Gallier, Carlo
  5. The economics of cryptocurrencies – bitcoin and beyond By Chiu, Jonathan; Koeppl, Thorsten V
  6. Online Auctions and Digital Marketing Agencies By Francesco Decarolis; Gabriele Rovigatti
  7. Peer-to-Peer Markets with Bilateral Ratings By T. Tony Ke; Baojun Jiang; Monic Sun

  1. By: Yao Cheng; Zaifu Yang
    Abstract: This paper considers a general and practical kidney exchange model with compatible or incompatible patient-donor pairs, single donors, and patients on the waiting list. Efficient exchange procedures are proposed with dichotomous preferences in which only one-way, two-way, three, or four-way chains or cycles of exchange are used. We derive a tight upper bound of the possible number of feasible kidney transplants in each case of exchange and provide substantial simulation results. We find that two-way cycles and chains of exchange can substantially increase the number of feasible transplants, threeway can have a visible effect, and at most four-way cycles and chains suffice to capture all potential gains of exchange. Our results are not only theoretically interesting but also have meaningful policy implications.
    Keywords: Kidney Exchange, Efficiency, Matching, Simulation.
    JEL: C78
    Date: 2017–10
  2. By: Herweg, Fabian (University of Bayreuth); Schmidt, Klaus (LMU)
    Abstract: The procurement of complex projects is often plagued by large cost overruns. One important reason for these additional costs are flaws in the initial design. If the project is procured with a price-only auction, sellers who spotted some of the flaws have no incentive to reveal them early. Each seller prefers to conceal his information until he is awarded the contract and then renegotiate when he is in a bilateral monopoly position with the buyer. We show that this gives rise to three inefficiencies: inefficient renegotiation, inefficient production and inefficient design. We derive the welfare optimal direct mechanism that implements the efficient allocation at the lowest possible cost to the buyer. The direct mechanism, however, imposes strong assumptions on the buyer\'s prior knowledge of possible flaws and their payoff consequences. Therefore, we also propose an indirect mechanism that implements the same allocation but does not require any such prior knowledge. The optimal direct and indirect mechanisms separate the improvement of the design and the selection of the seller who produces the good.
    Keywords: procurement; renegotiation; auctions; design flaws; adaptation costs; behavioral contract theory;
    JEL: D44 D82 D83 H57
    Date: 2017–10–17
  3. By: Laurent Bouton; Benjamin G. Ogden
    Abstract: We study the behavior of ethical voters in multicandidate elections. We consider two of the most-widely used electoral rules around the world: the plurality rule and the majority runoff rule. Our model delivers crisper predictions than those of the pivotal voter model. There are two types of equilibria: (i) the sincere voting equilibrium (in which voters vote for their most-preferred candidate), and (ii) Duverger's Law equilibria (in which two candidates attract all the votes). We prove that an equilibrium always exists, and that it is unique for a broad range of parameter values. Moreover, the sincere voting equilibrium never coexists with a Duverger's law equilibrium. We also identify the features of an election that favor sincere voting. Comparing plurality and majority runoff, we find that the incentives to vote sincerely are stronger under the latter. Our results are consistent with the findings of the empirical literature studying strategic voting under plurality and runoff rules.
    JEL: C72 D72
    Date: 2017–10
  4. By: Gallier, Carlo
    Abstract: I investigate if, how, and why the effect of a contribution rule in a public goods game depends on how it is implemented: endogenously chosen or externally imposed. The rule prescribes full contributions to the public good backed by a nondeterrent sanction for those who do not comply. My experimental design allows me to disentangle to what extent the effect of the contribution rule under democracy is driven by self-selection of treatments, information transmitted via the outcome of the referendum, and democracy per se. In case treatments are endogenously chosen via a democratic decision-making process, the contribution rule significantly increases contributions to the public good. However, democratic participation does not affect participants' contribution behavior directly, after controlling for self-selection of treatments and the information transmitted by voting.
    Keywords: laboratory experiment,public good,democracy,endogenous institutions,voting,contribution rule,compliance
    JEL: C91 D02 D72 K42
    Date: 2017
  5. By: Chiu, Jonathan; Koeppl, Thorsten V
    Abstract: How well can a cryptocurrency serve as a means of payment? We study the optimal design of cryptocurrencies and assess quantitatively how well such currencies can support bilateral trade. The challenge for cryptocurrencies is to overcome double-spending by relying on competition to update the blockchain (costly mining) and by delaying settlement. We estimate that the current Bitcoin scheme generates a large welfare loss of 1.4% of consumption. This welfare loss can be lowered substantially to 0.08% by adopting an optimal design that reduces mining and relies exclusively on money growth rather than transaction fees to finance mining rewards. We also point out that cryptocurrencies can potentially challenge retail payment systems provided scaling limitations can be addressed.
    Keywords: Cryptocurrency, Blockchain, Bitcoin, Double spending, Payment systems,
    Date: 2017
  6. By: Francesco Decarolis (Einaudi Institute for Economics and Finance, Via Sallustiana, 62, Rome, Italy); Gabriele Rovigatti (University of Chicago Booth School of Business, 5807 S. Woodlawn Ave, Chicago, IL)
    Abstract: We present an empirical investigation of the role of marketing agencies in Google’s online ad auctions. By combining data on advertisers’ affiliation to marketing agencies with data on bidding in ad auctions, we analyze how changes in the concentration of clients in the same industry under the same ad network are associated with changes in keyword bidding in terms of entry, exit, and pricing strategies. Moreover, by exploiting the case of a recent merger between agencies, we estimate through a difference-in-differences strategy that an increase in concentration leads to reduction in the average cost-per-click of the keywords affected by the merger.
    Keywords: Online Advertising, Internet Auctions, Marketing Agency, Ad Network, Agency Trading Desk
    JEL: C72 D44 L81
    Date: 2017–09
  7. By: T. Tony Ke (MIT Sloan School of Management); Baojun Jiang (Washington University in St. Louis); Monic Sun (Boston University)
    Abstract: We consider a platform that matches service providers with potential customers. Ratings of a service provider reveal the quality of his service while ratings of a consumer reveal the cost to serve her. Under a competitive search framework, we study how bilateral ratings influence market competition and segmentation. Two types of equilibria exist under bilateral ratings. In the first type, low-cost consumers only apply to high-quality service providers, who post a higher price, have longer queues and are less likely to accept an application than low-quality providers. High-cost consumers apply to all service providers and have a lower acceptance rate. In the second type of equilibria, both high- and low-quality service providers serve all consumers. Across all equilibria, equilibrium prices may decrease as the fraction of high-quality providers increases, as consumers become more costly to serve, and as the platform's commission rate increases. Compared with a platform with unilateral ratings where only service providers are rated, a platform with bilateral ratings may soften service providers' competition, leading to higher equilibrium prices. Lastly, we find that in the case of incomplete market coverage, high-quality service providers may charge lower prices than low-quality providers in equilibrium, because by charging a lower price, a high-quality service provider attracts more consumer applications, which enables him to cherrypick a low-cost consumer, while a low-quality service provider faces with consumers with higher serving costs and thus charge a higher price to make up the serving cost.
    Keywords: Platform; Peer-to-Peer; Competitive Search; Matching; Reviews; Information Disclosure; Segmentation
    JEL: D82 D83 M31
    Date: 2017–09

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.
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.