nep-des New Economics Papers
on Economic Design
Issue of 2017‒11‒19
twelve papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Market Power and Welfare in Asymmetric Divisible Good Auctions By Carolina Manzano; Xavier Vives
  2. Optimal Favoritism in All-Pay Auctions and Lottery Contests By Jörg Franke; Wolfgang Leininger; Cédric Wasser
  3. Optimal Cost Overruns: Procurement Auctions with Renegotiation By Herweg, Fabian; Schwarz, Marco A.
  4. The Dollar Auction Game: A laboratory comparison between Individuals and Groups By Morone, Andrea; Nuzzo, Simone; Caferra, Rocco
  5. Decentralized Matching Markets With(out) Frictions: A Laboratory Experiment By Joana Pais; Ágnes Pintér; Róbert F. Veszteg
  6. Static versus Dynamic Deferred Acceptance in School Choice: Theory and Experiment By Joana Pais; Flip Klijn; Marc Vorsatz
  7. Obvious Mistakes in a Strategically Simple College Admissions Environment By Ran I. Shorrer; Sandor Sovago
  8. Mechanism Design with Moral Hazard By Suehuyn Kwon
  9. Tailored Bayesian Mechanisms: Experimental Evidence from Two-Stage Voting Games By Dirk Engelmann; Hans Peter Grüner
  10. Consumer-Optimal Information Design By von Wangenheim, Jonas
  11. Pricing Advices By Suehyun Kwon
  12. The Competitive Effects of Linking Electricity Markets Across Space and Time By Tangerås, Thomas; Wolak, Frank A.

  1. By: Carolina Manzano; Xavier Vives
    Abstract: We analyze a divisible good uniform-price auction that features two groups each with a finite number of identical bidders. Equilibrium is unique, and the relative market power of a group increases with the precision of its private information but declines with its transaction costs. In line with empirical evidence, we find that an increase in transaction costs and/or a decrease in the precision of a bidding group.s information induces a strategic response from the other group, which thereafter attenuates its response to both private information and prices. A “stronger†bidding group -which has more precise private information, faces lower transaction costs, and is more oligopsonistic- has more market power and so will behave competitively only if it receives a higher per capita subsidy rate. When the strong group values the asset no less than the weak group, the expected deadweight loss increases with the quantity auctioned and also with the degree of payoff asymmetries. Market power and the deadweight loss may be negatively associated.
    Keywords: demand/supply schedule competition, private information, liquidity auctions, treasury auctions, electricity auctions
    JEL: D44 D82 G14 E58
    Date: 2016
  2. By: Jörg Franke; Wolfgang Leininger; Cédric Wasser
    Abstract: We analyze the revenue-enhancing potential of favoring specific contestants in complete information all-pay auctions and lottery contests with several heterogeneous contestants. Two instruments of favoritism are considered: Head starts that are added to the bids of specific contestants and multiplicative biases that give idiosyncratic weights to the bids. In the all-pay auction, head starts are more effective than biases while optimally combining both instruments even yields first-best revenue. In the lottery contest, head starts are less effective than biases and combining both instruments cannot further increase revenue. As all-pay auctions revenue-dominate lottery contests under optimal biases, we thus obtain an unambiguous revenue-ranking of all six combinations of contest formats and instruments.
    Keywords: all-pay auction, lottery contest, favoritism, head start, revenue dominance
    JEL: C72 D72
    Date: 2016
  3. By: Herweg, Fabian (University of Bayreuth); Schwarz, Marco A. (University of Innsbruck)
    Abstract: Cost overrun is ubiquitous in public procurement. We argue that this can be the result of a constrained optimal award procedure: The procurer awards the contract via a price-only auction and cannot commit not to renegotiate. If cost differences are more pronounced for a fancy than a standard design, it is optimal to fix the standard design ex ante. If renegotiation takes place and the fancy design has higher production costs or the contractor\'s bargaining position is strong, the final price exceeds the initial price. Moreover, the procurer cannot benefit from using a multi-dimensional auction, i.e., under the optimal scoring auction each supplier proposes the standard design.
    Keywords: auction; cost overrun; procurement; renegotiation;
    JEL: D44 D82 H57
    Date: 2017–11–09
  4. By: Morone, Andrea; Nuzzo, Simone; Caferra, Rocco
    Abstract: The aim of this paper is to analyze bidders’ behavior, comparing individuals and groups’ decisions within the dollar auction framework. This game induces subjects to fall prey into the paradigm of escalation, which is driven by agents’ commitment to higher and higher bids. Whenever each participant commits himself to a bid, the lower bidder, motivated by the wish to win as well as to defend his prior investment, finds it in his best interest to place a higher bid to overcome his opponent. The latter mechanism may lead subjects to overbid. We find that the Nash equilibrium of the game is only rarely attained. Second, we detect clean evidence that groups’ decisions are, on average, superior to individuals’ decisions. Learning over time is clearly evident, leading individuals to perform nearly as good as groups in the final rounds of the game.
    Keywords: escalation,winner’s curse
    JEL: C91
    Date: 2017
  5. By: Joana Pais; Ágnes Pintér; Róbert F. Veszteg
    Abstract: In a series of laboratory experiments, we explore the impact of different market features (the level of information, search costs, and the level of commitment) on agents’ behaviour and on the outcome of decentralized matching markets. In our experiments, subjects on each side of the market actively search for a partner, make proposals, and are free to accept or reject any proposal received at any time throughout the game. Our results suggest that a low information level boosts market activity but does not affect stability or efficiency of the final outcome, unless coupled with search costs. Search costs have a significant negative impact on market activity, and on both stability and efficiency. Finally, commitment harms stability slightly but acts as a disciplinary device to market activity and is associated with higher efficiency levels of the final outcome.
    Keywords: decentralized markets, two-sided matching, stability, efficiency, laboratory experiments
    JEL: C78 C91 D82
    Date: 2017–09
  6. By: Joana Pais; Flip Klijn; Marc Vorsatz
    Abstract: In the context of school choice, we experimentally study how behavior and outcomes are affected when, instead of submitting rankings in the student proposing or receiving deferred acceptance (DA) mechanism, participants make decisions dynamically, going through the steps of the underlying algorithms. Our main results show that, contrary to theory, (a) in the dynamic student proposing DA mechanism, participants propose to schools respecting the order of their true preferences slightly more often than in its static version while, (b) in the dynamic student receiving DA mechanism, participants react to proposals by always respecting the order and not accepting schools in the tail of their true preferences more often than in the corresponding static version. As a consequence, for most problems we test, no significant differences exist between the two versions of the student proposing DA mechanisms in what stability and average payoffs are concerned, but the dynamic version of the student receiving DA mechanism delivers a clear improvement over its static counterpart in both dimensions. In fact, in the aggregate, the dynamic school proposing DA mechanism is the best performing mechanism.
    Keywords: dynamic school choice, deferred acceptance, stability, efficiency
    JEL: C78 C91 C92 D78 I20
    Date: 2017–09
  7. By: Ran I. Shorrer (Pennsylvania State University, United States of America); Sandor Sovago (Vrije Universiteit Amsterdam)
    Abstract: In a centralized marketplace that was designed to be simple, we identify participants whose choices are dominated. Using administrative data from Hungary, we show that college applicants make obvious mistakes: they forgo the free opportunity to receive a tuition waiver worth thousands of dollars. At least 10 percent of the applicants made such mistakes in 2013. Costly mistakes have externalities: they transfer tuition waivers from high- to low-socioeconomic status students, and increase the number of students attending college. To shed light on the mechanisms underlying mistakes, we exploit a reform that substantially increased the selectivity of admission with financial aid in some fields of study. Increased admission selectivity raises the likelihood of making obvious mistakes, especially among high-socioeconomic status and low-achieving applicants. Our results suggest that mistakes are more common when their expected cost is lower. Still, the average cost of a mistake in 2013 was 114-365 dollars.
    Keywords: College admissions, dominated strategies, market design, obvious misrepresentation, school choice, strategy-proof
    JEL: C70 D61 D63
    Date: 2017–11–10
  8. By: Suehuyn Kwon
    Abstract: This paper studies dynamic mechanism design in the presence of moral hazard. Revelation principle extends to models with moral hazard for both full commitment and limited commitment, but I also identify environments in which the principal doesn’t benefit from eliciting agents’ private information or beliefs. One-shot deviation principle requires the knowledge of agents’ private strategies after deviations, and I characterize the necessary and sufficient condition for all IC constraints that requires only the knowledge of agents’ equilibrium strategies. I also provide two sufficient conditions for smaller set of IC constraints that require obedience after a single-period deviation to be sufficient for all IC constraints. I illustrate how to apply revelation principle and the smaller set of IC constraints with an application allowing for endogenous state.
    Keywords: dynamic mechanism design, adverse selection, moral hazard, revelation principle, one-shot deviation principle, endogenous state
    Date: 2017
  9. By: Dirk Engelmann; Hans Peter Grüner
    Abstract: Optimal voting rules have to be tailored to the underlying distribution of preferences. This paper shows that the introduction of a stage at which agents may themselves choose voting rules according to which they decide in a second stage may increase the sum of individuals’ payoffs if players are not all completely selfish. Our experiments aim to understand how privately informed individuals choose voting rules and vote given these rules. In a setting with an asymmetric distribution of valuations groups that can choose a voting rule do better than those who decide with a given simple majority voting rule.
    Keywords: two-stage voting, Bayesian voting, experiments
    JEL: C91 D70 D82
    Date: 2017
  10. By: von Wangenheim, Jonas (Humboldt University Berlin)
    Abstract: In many trade environments - such as online markets - buyers fully learn their valuation for goods only after contracting. I characterize the buyer-optimal ex-ante information in such environments. Employing a classical sequential screening framework, I find that buyers prefer to remain partially uninformed, since such an information structure induces the seller to set low prices. For the optimal information signal, trade is efficient, and the seller only extracts the static monopoly profit. Further, I fully characterize all possible surplus divisions that can arise in sequential screening for a given prior.
    Keywords: information disclosure; sequential screening; strategic learning; bayesian persuasion; mechanism design;
    JEL: D82
    Date: 2017–11–02
  11. By: Suehyun Kwon
    Abstract: This paper studies a selling mechanism where the seller first charges a fee for advice (information structure) then sells a product. When the buyer has no private information, the seller can extract full surplus, both when the seller has private information and when he doesn’t. If only the buyer has private information, the seller cannot extract full surplus. When both the seller and the buyer have private information, selling advice can strictly increase the probability of trade, and it is welfare-improving for both parties. In the private-value setting, Myerson-Satterthwaite no-trade theorem can be overcome by this mechanism. If the seller’s valuation doesn’t depend on the buyer type, then commitment power doesn’t change results, but with interdependent values, the limited-commitment solution cannot replicate the full-commitment solution.
    Keywords: information design, dynamic informed-principal problem, interdependent values, limited commitment, Myerson-Satterthwaite
    Date: 2017
  12. By: Tangerås, Thomas (Research Institute of Industrial Economics (IFN)); Wolak, Frank A. (Program on Energy and Sustainable Development and Department of Economics)
    Abstract: We show that a common regulatory mandate in electricity markets that use location-based pricing that requires all customers to purchase their wholesale electricity at the same quantity-weighted average of the locational prices can increase the performance of imperfectly competitive wholesale electricity markets. Linking locational markets strengthens the incentive for vertically integrated firms to participate in the retail market, which increases competition in the short-term wholesale market. In contrast, linking locational markets through a long-term contract that clears against the quantity-weighted average of short-term wholesale prices does not impact average wholesale market performance. These results imply that a policy designed to address equity considerations can also enhance efficiency in wholesale electricity markets.
    Keywords: Electricity markets; Equity; Market design; Market performance; Market power; Vertical integration
    JEL: C72 D43 G10 G13 L13
    Date: 2017–10–17

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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