nep-des New Economics Papers
on Economic Design
Issue of 2019‒01‒14
seven papers chosen by
Alex Teytelboym
University of Oxford

  1. On Mechanisms for Costly Inclusion By Andrew Mackenzie; Christian Trudeau
  2. Equivalent Choice Functions and Stable Mechanisms By Jan Christoph Schlegel
  3. Approximately Optimal Mechanism Design By Tim Roughgarden; Inbal Talgam-Cohen
  4. Modularity and greed in double auctions By Dütting, Paul; Talgam-Cohen, Inbal; Roughgarden, Tim
  5. Endogenous worst-case beliefs in first-price auctions By Gretschko, Vitali; Mass, Helene
  6. A Common-Value Auction with State-Dependent Participation By Stephan Lauermann; Asher Wolinsky
  7. Bayesian Implementation and Rent Extraction in a Multi-Dimensional Procurement Problem By Herweg, Fabian; Schmidt, Klaus

  1. By: Andrew Mackenzie (Department of Economics, Maastricht University); Christian Trudeau (Department of Economics, University of Windsor)
    Abstract: We investigate mechanisms in a class of production environments where each group of agents can `win' for an associated monetary cost; examples include the allocation of an indivisible object and the provision of a pure public good. A mechanism is satisfactory if and only if it is surplus-maximizing and honesty is necessarily a dominant strategy for each agent; it is autonomous if and only if it is satisfactory and production is funded through voluntary contributions of the agents; it is equitable if and only if it is satisfactory and no agent prefers another's bundle to his own. First, we introduce the notion of inclusion cost coverage for cost functions, and prove that this condition is necessary and sufficient for the existence of autonomous mechanisms (Theorem 1). Second, we prove that the cost function is symmetric and convex if and only if there are equitable mechanisms (Theorem 2); in this case, we characterize both the class of equitable mechanisms (Theorem 3) as well as the class of autonomous and equitable mechanisms (Theorem 4). We discuss a variety of applications and additional topics.
    Keywords: game theory; second price auction, free-rider problem, pivot mechanism, Walrasian price, production.
    JEL: D82 D61 H41 D44
    Date: 2019–01
  2. By: Jan Christoph Schlegel
    Abstract: We study conditions for the existence of stable and group-strategy-proof mechanisms in a many-to-one matching model with contracts if students' preferences are monotone in contract terms. We show that "equivalence", properly defined, to a choice profile under which contracts are substitutes and the law of aggregate holds is a necessary and sufficient condition for the existence of a stable and group-strategy-proof mechanism. Our result can be interpreted as a (weak) embedding result choice functions under which contracts are observable substitutes and the observable law of aggregate demand holds.
    Date: 2018–12
  3. By: Tim Roughgarden; Inbal Talgam-Cohen
    Abstract: Optimal mechanism design enjoys a beautiful and well-developed theory, and also a number of killer applications. Rules of thumb produced by the field influence everything from how governments sell wireless spectrum licenses to how the major search engines auction off online advertising. There are, however, some basic problems for which the traditional optimal mechanism design approach is ill-suited---either because it makes overly strong assumptions, or because it advocates overly complex designs. This survey reviews several common issues with optimal mechanisms, including exorbitant communication, computation, and informational requirements; and it presents several examples demonstrating that passing to the relaxed goal of an approximately optimal mechanism allows us to reason about fundamental questions that seem out of reach of the traditional theory.
    Date: 2018–12
  4. By: Dütting, Paul; Talgam-Cohen, Inbal; Roughgarden, Tim
    Abstract: Designing double auctions is a complex problem, especially when there are restrictions on the sets of buyers and sellers that may trade with one another. The goal of this paper is to develop a modular approach to the design of double auctions, by relating it to the exhaustively-studied problem of designing one-sided mechanisms with a single seller (or, alternatively, a single buyer). We consider several desirable properties of a double auction: feasibility, dominant-strategy incentive compatibility, the still stronger incentive constraints offered by a deferred-acceptance implementation, exact and approximate welfare maximization, and budget balance. For each of these properties, we identify sufficient conditions on two one-sided algorithms—one for ranking the buyers, one for ranking the sellers—and on a method for their composition into trading pairs, which guarantee the desired property of the double auction. Our framework also offers new insights into classic double auction designs, such as the VCG and McAfee auctions with unit-demand buyers and unit-supply sellers.
    Keywords: mechanism design; double auctions; trade reduction mechanism; deferred-acceptance auctions
    JEL: J1
    Date: 2017–09–01
  5. By: Gretschko, Vitali; Mass, Helene
    Abstract: Bidding in first-price auctions crucially depends on the beliefs of the bidders about their competitors' willingness to pay. We analyze bidding behavior in a first-price auction in which the knowledge of the bidders about the distribution of their competitors' valuations is restricted to the support and the mean. To model this situation, we assume that under such uncertainty a bidder will expect to face the distribution of valuations that minimizes her expected utility, given her bid is an optimal reaction to the bids of her competitors induced by this distribution. This introduces a novel way to endogenize beliefs in games of incomplete information. We find that for a bidder with a given valuation her worst-case belief just puts sufficient probability weight on lower valuations of her competitors to induce a high bid. At the same time the worst-case belief puts as much as possible probability weight on the same valuation in order to minimize the bidder's winning probability. This implies that even though the worst-case beliefs are type dependent in a non-monotonic way, an efficient equilibrium of the first-price auction exists.
    Keywords: auctions,mechanism design,beliefs,uncertainty
    JEL: D44 D81 D82
    Date: 2018
  6. By: Stephan Lauermann; Asher Wolinsky
    Abstract: This paper analyzes a common-value, first-price auction with state-dependent participation. The number of bidders, which is unobservable to them, depends on the true value. For exogenously given participation patterns that involve many bidders in each state, the bidding equilibrium may be of a "pooling" type---with high probability, the winning bid is the same across states and is below the ex-ante expected value---or of a "partially separating" type---with no significant atoms in the winning bid distribution and an expected winning bid increasing in the true value. Which of these forms will arise is determined by the likelihood ratio at the top of the signal distribution and the participation across states. When the state-dependent participation is endogenized as the strategic solicitation by an informed seller who bears a small cost for each solicited bidder, an equilibrium of the separating type always exists and is unique of this type; for certain signal distributions there also exist equilibria of the pooling type.
    Keywords: Search, Auctions, Adverse Selection
    JEL: C78 D83
    Date: 2018–12
  7. By: Herweg, Fabian (University of Bayreuth); Schmidt, Klaus (LMU Munich)
    Abstract: We consider a multi-dimensional procurement problem in which sellers have private information about their costs and about a possible design flaw. The information about the design flaw is necessarily correlated. We solve for the optimal Bayesian procurement mechanism that implements the efficient allocation under the constraint that sellers are protected by limited liability. We show that the rents obtained from reporting costs truthfully can be used to reduce the rents sellers must get for reporting the flaw. We compare the optimal Bayesian mechanism to the optimal ex post incentive compatible mechanism that is informationally less demanding.
    Keywords: auctions; correlated types; inefficient renegotiation; multidimensional screening; procurement; ;
    JEL: D44 D82 H57
    Date: 2018–12–20

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