nep-des New Economics Papers
on Economic Design
Issue of 2018‒12‒17
seven papers chosen by
Alex Teytelboym
University of Oxford

  1. Strategically Simple Mechanisms By Tilman Borgers; Jiangtao Li
  2. Sequential School Choice with Public and Private Schools By Andersson, Tommy; Dur, Umut; Ertemel, Sinan; Kesten , Onur
  3. Equilibrium Play in First Price Auctions: Revealed Preference Analysis By Laurens Cherchye; Thomas Demuynck; Bram De Rock; Mikhail Freer
  4. Optimal Dynamic Auctions are Virtual Welfare Maximizers By Vahab Mirrokni; Renato Paes Leme; Pingzhong Tang; Song Zuo
  5. Membership Mechanism By Seung Han Yoo
  6. Liquidity misallocation in an over-the-counter market By Zhang, Shengxing
  7. Revenue and efficiency in pollution permit allocation mechanisms By Peyman Khezr; Ian A. MacKenzie

  1. By: Tilman Borgers (Department of Economics, University of Michigan); Jiangtao Li (Dept. of Economics, National University of Singapore (NUS))
    Abstract: We de?ne and investigate a property of mechanisms that we call “strategic simplicity,” and that is meant to capture the idea that, in strategically simple mechanisms, strategic choices require limited strategic sophistication. We de?ne a mechanism to be strategically simple if choices can be based on ?rst-order beliefs about the other agents’ preferences and ?rst-order certainty about the other agents’ rationality alone, and there is no need for agents to form higher-order beliefs, because such beliefs are irrelevant to the optimal strategies. All dominant strategy mechanisms are strategically simple. But many more mechanisms are strategically simple. In particular, strategically simple mechanisms may be more flexible than dominant strategy mechanisms in the bilateral trade problem and the voting problem.
    Keywords: Mechanism design, Complexity
    JEL: D82
    Date: 2018–12
  2. By: Andersson, Tommy (Department of Economics, Lund University); Dur, Umut (Department of Economics, North Carolina State University); Ertemel, Sinan (Department of Economics, Istanbul Technical University); Kesten , Onur (Tepper School of Business, Carnegie Mellon University)
    Abstract: Motivated by school admission systems used in, e.g., Turkey and Sweden, this paper investigates a sequential two-stage admission system with public and private schools. To perform the analysis, relevant axioms and equilibrium notions need to be tailored for the considered dynamic setting. In particular, a notion of truthfulness, referred to as straightforwardness, is introduced. In sharp contrast to classic one-stage admission systems, sequentiality leads to a trade-off between the existence of a straightforward (i.e., truthful) equilibrium and non-wastefulness. Given this insight, we identify the unique set of rules for two-stage admission systems that guarantees the existence of a straightforward equilibrium and, at the same time, reduces the number of wasted school seats. Several existing admission systems are also theoretically analyzed within our general framework and empirically evaluated using school choice data from Sweden. The latter analysis allows us to quantify various trade-offs in sequential admission systems.
    Keywords: market design; sequential school choice; private schools; public schools; straightforward SPNE; non-wastefulness
    JEL: C71 C78 D71 D78 D82
    Date: 2018–12–10
  3. By: Laurens Cherchye; Thomas Demuynck; Bram De Rock; Mikhail Freer
    Abstract: We provide a revealed preference characterization of equilibrium behavior in first price sealed bid auctions. This defines testable conditions for equilibrium play that are intrinsically nonparametric, meaning that they do not require a non-verifiable specification of the individual utility functions. We characterize equilibrium play for a sequence of observations on private values and bids for a given individual. In a first step, we assume that the distribution of bids in the population is fully known. In a second step, we relax this assumption and consider the more realistic case that the empirical analyst can only use a finite number of i.i.d. observations drawn from the population distribution. We demonstrate the empirical usefulness ofour conditions through an illustrative application to an existing experimental data set of Neugebauer and Perote 2008. This application also shows the potential of our nonparametric characterization to study the behavioral phenomena learning and fatigue at the individual level.
    Keywords: first price auctions, equilibrium play, revealed preference characterization, testable implications, experimental data.
    Date: 2018–12
  4. By: Vahab Mirrokni; Renato Paes Leme; Pingzhong Tang; Song Zuo
    Abstract: We are interested in the setting where a seller sells sequentially arriving items, one per period, via a dynamic auction. At the beginning of each period, each buyer draws a private valuation for the item to be sold in that period and this valuation is independent across buyers and periods. The auction can be dynamic in the sense that the auction at period $t$ can be conditional on the bids in that period and all previous periods, subject to certain appropriately defined incentive compatible and individually rational conditions. Perhaps not surprisingly, the revenue optimal dynamic auctions are computationally hard to find and existing literatures that aim to approximate the optimal auctions are all based on solving complex dynamic programs. It remains largely open on the structural interpretability of the optimal dynamic auctions. In this paper, we show that any optimal dynamic auction is a virtual welfare maximizer subject to some monotone allocation constraints. In particular, the explicit definition of the virtual value function above arises naturally from the primal-dual analysis by relaxing the monotone constraints. We further develop an ironing technique that gets rid of the monotone allocation constraints. Quite different from Myerson's ironing approach, our technique is more technically involved due to the interdependence of the virtual value functions across buyers. We nevertheless show that ironing can be done approximately and efficiently, which in turn leads to a Fully Polynomial Time Approximation Scheme of the optimal dynamic auction.
    Date: 2018–12
  5. By: Seung Han Yoo (Department of Economics, Korea University, Seoul, Republic of Korea)
    Abstract: This paper studies an environment in which a seller seeks to sell two different items to buyers. The seller designs a membership mechanism that assigns positive allocations to members only. Exploiting the restrictive set, the seller finds a revenue-maximizing incentive compatible mechanism. We first establish the optimal allocation rule for this membership mechanism given a regularity condition for a modified valuation distribution reflecting the set, which provides the existence of a member set and the optimal payment rule. The optimal allocation enables us to compare the membership with separate selling of the two items, suggesting conditions under which the membership dominates the separate selling: interplay between the number of bidders and the degree of the stochastic dominance of valuation distributions.
    Keywords: Mechanism design, Multidimensional screening, Auction
    Date: 2018
  6. By: Zhang, Shengxing
    Abstract: To understand the illiquidity of the over-the-counter market when dealers and traders are in long-term relationships, I develop a framework to study the endogenous liquidity distortions resulting from the profit-maximizing, screening behavior of dealers. The dealer offers the trading mechanism contingent on the aggregate history of his customers summarized by the asset allocation. The equilibrium distortion is type dependent: trade with small surplus breaks down; trade with intermediate surplus may be delayed; trade with large surplus is carried out with a large bid/ask spread but without delay. Because of dealers' limited commitment, the distortions become more severe when the valuation shock is frequent, the valuation dispersion is large or the matching friction to form new relationships is large. Calibrating the model and running a horse race between matching efficiency, trading speed and relationship stability, I found that the liquidity disruption in the market during the recent financial crisis is more consistent with declining matching efficiency of forming trading relationsh
    Keywords: screening; liquidity; long-term relationship; over-the-counter markets
    JEL: D82 D83 G1
    Date: 2018–03–01
  7. By: Peyman Khezr (School of Economics, University of Queensland, Brisbane); Ian A. MacKenzie (School of Economics, University of Queensland, Brisbane)
    Abstract: The most contentious design issue within pollution markets is the choice of initial allocation mechanism. Within this debate, auctions have become the predominant method of initial permit allocation. Although auctions provide potential gains—such as revenue generation, allocative efficiency and clear price discovery—these benefits are rarely fully realized due to firms submitting non-truthful bids. We propose a mechanism that can improve on existing auctions. In our design the regulator determines the supply (up to an upper bound) once all bids have been submitted. This simple and applicable design incites truthful revelation of firms’ private abatement costs, maximizes revenue, and allocates the permits efficiently. This design is relevant to all existing permit auctions including those in the European Union Emissions Trading Scheme (EU-ETS), Regional Greenhouse Gas Initiative (RGGI), and the California Cap-and-Trade Program.
    Keywords: multi-unit auction, pollution permit
    JEL: D44 Q52
    Date: 2018–11–23

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