nep-des New Economics Papers
on Economic Design
Issue of 2018‒01‒22
six papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Impact Evaluation in Matching Markets with General Tie-Breaking By Atila Abdulkadiroglu; Joshua D. Angrist; Yusuke Narita; Parag A. Pathak
  2. Augmenting Markets with Mechanisms By Samuel Antill; Darrell Duffie
  3. Intermediation in peer-to-peer markets: Evidence from auctions for personal loans By Klein, Thilo
  4. A Theory of Crowdfunding -A Mechanism Design Approach with Demand Uncertainty and Moral Hazard: Comment By Matthew Ellman; Sjaak Hurkens
  5. Cryptocurrency Voting Games By Bhattacherjee, Sanjay; Sarkar, Palash
  6. INEFFICIENT RATIONING WITH POST-CONTRACTUAL INFORMATION By Ottorino Chillemi; Stefano Galavotti; Benefetto Gui

  1. By: Atila Abdulkadiroglu; Joshua D. Angrist; Yusuke Narita; Parag A. Pathak
    Abstract: Many centralized matching schemes incorporate a mix of random lottery and non-lottery tie-breaking. A leading example is the New York City public school district, which uses criteria like test scores and interviews to generate applicant rankings for some schools, combined with lottery tie-breaking at other schools. We develop methods that identify causal effects of assignment in such settings. Our approach generalizes the standard regression discontinuity design to allow for many running variables and treatments, some of which are randomly assigned. We show that lottery variation generates assignment risk at non-lottery programs for applicants away from non-lottery cutoffs, while non-lottery variation randomizes applicants near cutoffs regardless of lottery risk. These methods are applied to evaluate New York City’s school progress assessments, which give schools letter grades as a summary measure of quality. Our estimates reveal that although Grade A schools boost achievement, these gains emerge only for students who attend lottery schools. Attendance at a coveted Grade A screened school, including some of the highest performing in the district, generates no measurable effects. Evaluation methods that fail to take advantage of both lottery and non-lottery variation miss this difference in impact.
    JEL: C26 I20
    Date: 2017–12
  2. By: Samuel Antill; Darrell Duffie
    Abstract: We compute optimal mechanism designs for each of a sequence of size-discovery sessions, at which traders submit reports of their excess inventories of an asset to a session operator, which allocates transfers of cash and the asset. The mechanism design induces truthful reports of desired trades and perfectly reallocates the asset across traders. Between sessions, in a dynamic auction market, traders strategically lower their price impacts by shading their bids, causing socially costly delays in rebalancing the asset across traders. As the expected frequency of size-discovery sessions is increased, market depth is further lowered, offsetting the efficiency gains of the size-discovery sessions. Adding size-discovery sessions to a double-auction market has no social value, beyond that of an initializing session. If the mechanism design relies on the double-auction market for information from prices, bidding incentives are further weakened, strictly reducing overall market efficiency.
    JEL: D82 G14
    Date: 2017–12
  3. By: Klein, Thilo
    Abstract: I examine the role of intermediaries on the world's largest peer-to-peer online lending platform. This marketplace as well as other recently opened lending websites allow people to auction microcredit over the internet and are in line with the disintermediation in financial transactions through the power of enabling technologies. On the online market, the screening of potential borrowers and the monitoring of loan repayment can be delegated to designated group leaders. I find that, despite superior private information, these financial intermediaries perform worse than the average lender with respect to borrower selection. I attribute this to deliberately sending wrong signals. Bivariate probit estimates of the effect of group membership on loan default indicate positive self selection into group loans. That is borrowers with worse observed and unobserved characteristics select into this contract form. I provide evidence that this is due to a missleading group reputation system that is driven by a short term incentive design, which was introduced by the platform to expand the market and has been discontinued. I further find that, after controlling for this group growth driven selection effect, group affliation per se significantly reduces the probability of loan default.
    Keywords: peer-to-peer,finance,market design,matching,auctions
    JEL: D02 D82 G21 O16
    Date: 2017
  4. By: Matthew Ellman; Sjaak Hurkens
    Abstract: Strausz (2017) claims that crowdfunding implements the optimal mechanism design outcome in an environment with entrepreneurial moral hazard and private cost information. Unfortunately, his analysis, solution and claim depend critically on imposing an untenable condition (29) that he had explicitly discarded from his weak feasibility concept.1 This condition is essentially equivalent to ex post participation. We explain why it is inconsistent to assume consumers can opt out after learning the entrepreneur's cost structure in a model of fraud. We then study weak feasibility without the corresponding ex post participation constraint. We provide a simple example of a crowdfunding design that raises profit and welfare by tolerating some fraud risk. This shows how cross-subsidizing between cost states relaxes the most restrictive moral hazard constraints and generates better outcomes. We then characterize the optimal mechanism in the case of one consumer and two cost states. In general, this must hide information, including prices, from consumers. So crowdfunding cannot implement these optima.
    Keywords: crowfunding, Mechanism Design, moral hazard, private information
    JEL: C72 D42 D81 D82 D86 L12 L26
    Date: 2017–12
  5. By: Bhattacherjee, Sanjay; Sarkar, Palash
    Abstract: This work shows that weighted majority voting games occur in cryptocurrencies. In particular, two such games are highlighted. The first game, which we call the Rule Game, pertains to the scenario where the entities in the system engage in a voting procedure to accept or reject a change of rules. The second game, which we call the Attack Game, refers to the scenario where a group of entities in a cryptocurrency system can form a coalition to engage in double spending. For the Rule Game we provide analysis to argue that the Coleman’s preventive power measure is the appropriate tool for measuring a player’s influence in the game while for the Attack Game, we define a notion of stability based on the notion of minimal winning coalitions. For both the Rule Game and the Attack Game, we show how to analyse the games based on a snapshot of real world data for Bitcoin which is presently the most popular of all the cryptocurrencies.
    Keywords: Voting games, Cryptocurrency, Bitcoin, preventive power, stability
    JEL: C15 C71 D72 D74 Y10 Y20 Y80
    Date: 2017–11–30
  6. By: Ottorino Chillemi (University of Padova); Stefano Galavotti (University of Padova); Benefetto Gui (Unviersity of Padova)
    Abstract: We study a contractual design problem between a seller and a buyer where some information correlated with the buyer's valuation is publicly observed ex-post and the allocation, but not payments, can be made contingent on it. Our analysis shows that, to maximize her profit, the seller should offer one contract in which the good is transferred to the buyer only if the ex-post signal turns out to be bad; this generates inefficient rationing: some buyers with low valuation are assigned the good more often than others with higher valuation. We show that, in contrast with previous results, the optimal contract may decrease social welfare relative to the case in which no signal is available (or it is not used). We apply our model to interpret two real-world situations: internet plans with bandwidth caps for mobile phones and promotion schemes in organizations with exogenously fixed wages.
    Keywords: rationing, ex-post information, mechanism design.
    JEL: D82 D86
    Date: 2017–12

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