nep-des New Economics Papers
on Economic Design
Issue of 2019‒03‒18
four papers chosen by
Alex Teytelboym
University of Oxford

  1. Breaking Ties: Regression Discontinuity Design Meets Market Design By Atila Abdulkadiroglu; Joshua D. Angrist; Yusuke Narita; Parag A. Pathak
  2. Tournament Rewards and Heavy Tails By Mikhail Drugov; Dmitry Ryvkin
  3. Your money or your time? Experimental evidence on overbidding in all-pay auctions By Adriana Breaban; Charles N. Noussair; Andreea Victoria Popescu
  4. Colors, Emotions, and the Auction Value of Paintings By Ma, Marshall (Xiaoyin); Noussair, Charles; Renneboog, Luc

  1. By: Atila Abdulkadiroglu (Duke University); Joshua D. Angrist (MIT); Yusuke Narita (Cowles Foundation, Yale University); Parag A. Pathak (MIT)
    Abstract: Centralized school assignment algorithms must distinguish between applicants with the same preferences and priorities. This is done with randomly assigned lottery numbers, nonlottery tie-breakers like test scores, or both. The New York City public high school match illustrates the latter, using test scores, grades, and interviews to rank applicants to screened schools, combined with lottery tie-breaking at unscreened schools. We show how to identify causal effects of school attendance in such settings. Our approach generalizes regression discontinuity designs to allow for multiple treatments and multiple running variables, some of which are randomly assigned. Lotteries generate assignment risk at screened as well as unscreened schools. Centralized assignment also identi?es screened school effects away from screened school cutoffs. These features of centralized assignment are used to assess the predictive value of New York City’s school report cards. Grade A schools improve SAT math scores and increase the likelihood of graduating, though by less than OLS estimates suggest. Selection bias in OLS estimates is egregious for Grade A screened schools.
    Keywords: Causal Inference, Natural Experiment, Local Propensity Score, Instrumental Variables, Unified Enrollment, School Report Card, School Value Added
    Date: 2019–03
  2. By: Mikhail Drugov (New Economic School and CEPR); Dmitry Ryvkin (Department of Economics, Florida State University)
    Abstract: Heavy-tailed fluctuations are common in many environments, such as sales of creative and innovative products or the financial sector. We study how the presence of heavy tails in the distribution of shocks affects the optimal allocation of prizes in rank-order tournaments. While a winner-take-all prize schedule maximizes aggregate effort for light-tailed shocks, prize sharing becomes optimal when shocks acquire heavy tails, increasingly so following a skewness order. Extreme prize sharing { rewarding all ranks but the very last { is optimal when shocks have a decreasing failure rate, such as power laws. Hence, under heavy-tailed uncertainty, typically associated with strong inequality in the distribution of gains, providing incentives and reducing inequality go hand in hand.
    Keywords: heavy tails, power law, tournament, optimal allocation of prizes, failure rate
    JEL: C72 D86 M52
    Date: 2018–10
  3. By: Adriana Breaban (Chapman University and Erasmus University of Rotterdam); Charles N. Noussair (University of Arizona); Andreea Victoria Popescu (Tilburg University)
    Abstract: Competition for a prize frequently takes the form of dedicating time toward winning a contest. Those who spend the most time become more likely to obtain the prize. We model this competition as an all-pay auction under incomplete information, and report an experiment in which expenditures and rewards are in terms of time. In the experiment, subjects must stay in the laboratory doing nothing for an initially prespecified length of time. However, they can bid, in terms of time, to leave early. The auction has an allpay structure so that if an individual does not submit the highest bid within her group, she must stay for the additional time that she bid. We correlate behavior in this game with behavior in an isomorphic all-pay auction played with money bids. We also consider how two measures of sophistication, the Cognitive Reflection Test (CRT) score, and performance on a probability calibration task, correlate with behavior. We find strong similarities in overall behavior between the auctions conducted with money and with time. Bidding greater than equilibrium levels is typical, and as a consequence, average earnings are negative in both auctions. Thus, the result that there is overdissipation of rent in all-pay auctions extends to competition in terms of time. Higher CRT score and more accurate probability calibration correlate with better decisions in auctions played for money but not those played for time.
    Date: 2018
  4. By: Ma, Marshall (Xiaoyin) (Tilburg University, Center For Economic Research); Noussair, Charles (Tilburg University, Center For Economic Research); Renneboog, Luc (Tilburg University, Center For Economic Research)
    Abstract: We study the impact of colors of paintings on prices in the art auction market and incorporate color attributes of non-figurative paintings in pricing models. A one standard deviation increase in the percentages of blue (red) hue leads to premiums of 10.63% (4.20%). We also conduct laboratory experiments in China, the Netherlands, and U.S., and elicit participants’ willingness-to-pay and emotions (pleasure-arousal). Blue (red) paintings command 18.57% (17.28%) higher bids and stronger intention to purchase. Although abstract art is visually arousing, it is the emotional pleasure channel that relates colors and prices. Our results are consistent across all three cultures.
    Keywords: emotion; auction; art investment; cultural economics
    JEL: C91 D44 G02 G11 Z11
    Date: 2019

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