nep-des New Economics Papers
on Economic Design
Issue of 2019‒05‒06
fourteen papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Constitutional Implementation of Vertical and Horizontal Reservations in India: A Unified Mechanism for Civil Service Allocation and College Admissions By Tayfun Sönmez; M. Bumin Yenmez
  2. School Choice with Unequal Outside Options By Akbarpour, Mohammad; van Dijk, Winnie
  3. Matching for the Israeli "Mechinot" Gap-Year Programs: Handling Rich Diversity Requirements By Yannai A. Gonczarowski; Lior Kovalio; Noam Nisan; Assaf Romm
  4. An Empirical Framework for Sequential Assignment: The Allocation of Deceased Donor Kidneys By Agarwal, Nikhil; Ashlagi, Itai; Rees, Michael; Somaini, Paulo; Waldinger, Daniel
  5. Redistribution through Markets By Dworczak, Pitor; Kominers, Scott Duke; Akbarpour, Mohammad
  6. Experiments On Matching Markets: A Survey By Hakimov, Rustamdjan; Kübler, Dorothea
  7. Efficiency in Truthful Auctions via a Social Network By Seiji Takanashi; Takehiro Kawasaki; Taiki Todo; Makoto Yokoo
  8. The Optimal Sequence of Prices and Auctions By Zhang, Hanzhe
  9. The Declining Price Anomaly is not Universal in Multi-Buyer Sequential Auctions (but almost is) By Vishnu V. Narayan; Enguerrand Prebet; Adrian Vetta
  10. Compression Auctions With an Application to LIBOR-SOFR Swap Conversion By Duffie, Darrell
  11. Financial Contracts as Coordination Device By Le Coq, Chloe; Schwenen, Sebastian
  12. Dynamic Incentives for Buy-Side Analysts By Rahul Deb; Mallesh M. Pai; Maher Said
  13. Welfare optimal information structures in bilateral trade By Christoph Schottmüller
  14. A strategic tax mechanism By Stamatopoulos, Giorgos

  1. By: Tayfun Sönmez (Boston College); M. Bumin Yenmez (Boston College)
    Abstract: In order to address the historic discrimination faced by various communities under the caste system, a comprehensive affirmative action system exists in India, reserving access to government jobs and to enrollment in higher educational institutions. While there is a Supreme Court-mandated mechanism to implement these reservations when the positions are homogeneous, no mechanism is provided when the positions are heterogeneous. This gap results in widespread adoption of unconstitutional mechanisms, countless lawsuits, regular judicial review, and inconsistent judgements including at the Supreme Court level. We identify the root cause of all these challenges, and propose a design to overcome them.
    Keywords: Market design, matching, affirmative action, deferred acceptance
    JEL: C78
    Date: 2019–04–15
  2. By: Akbarpour, Mohammad (Graduate School of Business, Stanford University); van Dijk, Winnie (Department of Economics, University of Chicago)
    Abstract: Students with identical valuations for public schools but unequal outside options have different opportunity costs of revealing their preferences. Consequently, manipulable mechanisms need not resolve conflicting preferences in a Pareto-improving manner. We show that when they do not, welfare improvements for students with outside options come at the expense of students without outside options. This result strengthens the argument that strategyproof mechanisms “level the playing field.†Our model predicts that students without outside options are more likely to strategize, consistent with recent findings in empirical studies of education markets.
    JEL: D82 I24
    Date: 2018–09
  3. By: Yannai A. Gonczarowski; Lior Kovalio; Noam Nisan; Assaf Romm
    Abstract: We describe our experience with designing and running a matching market for the Israeli "Mechinot" gap-year programs. The main conceptual challenge in the design of this market was the rich set of diversity considerations, which necessitated the development of an appropriate preference-specification language along with corresponding choice-function semantics, which we also theoretically analyze to a certain extent. This market was run for the first time in January 2018 and matched 1,607 candidates (out of a total of 2,580 candidates) to 35 different programs, and has been adopted by the Joint Council of the "Mechinot" gap-year programs for the foreseeable future.
    Date: 2019–05
  4. By: Agarwal, Nikhil (Department of Economics, MIT and NBER); Ashlagi, Itai (Management Science and Engineering, Stanford U); Rees, Michael (Department of Urology, University of Toledo Medical Center); Somaini, Paulo (Stanford Graduate School of Business and NBER); Waldinger, Daniel (Furman Center and Department of Economics, New York University)
    Abstract: A transplant can improve a patient’s life while saving several hundreds of thousands of dollars in healthcare expenditures. Organs from deceased donors, like many other scarce public resources (e.g. public housing, child-care, publicly funded long-term care), are rationed via a sequential offer waiting list. The theoretical trade-offs in designing these mechanisms are not well understood and depend on agent preferences. This paper establishes an empirical framework for analyzing the trade-offs involved in designing sequential offer waiting lists and applies it to study the allocation of deceased donor kidneys. We model the decision to accept an organ while on the waiting list as an optimal stopping problem and use it to estimate the value of accepting various kidneys. Our estimates show that while some types of organs are preferable for all patients (e.g. organs from young donors), there is substantial match-specific heterogeneity in values. We show how to use these estimates to solve for the equilibria of counterfactual mechanisms. These techniques are then used to find mechanisms that improve on design goals such as improving the match quality of transplants and reducing organ waste.
    Date: 2019–01
  5. By: Dworczak, Pitor (Department of Economics, Northwestern University); Kominers, Scott Duke (Entrepreneurial); Akbarpour, Mohammad (Management Unit, Harvard Business School; Department of Economics, Center of Mathematical Sciences and)
    Abstract: When macroeconomic tools fail to respond to wealth inequality optimally, regulators can still seek to mitigate inequality within individual markets. A social planner with distributional preferences might distort allocative efficiency to achieve a more desirable split of surplus, for example, by setting higher prices when sellers are poor--effectively, using the market as a redistributive tool. In this paper, we seek to understand how to design goods markets optimally in the presence of inequality. Using a mechanism design approach, we uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution in a setting where the second welfare theorem fails because of private information and participation constraints. We find that competitive equilibrium allocation is not always optimal. Instead, when there is substantial inequality across sides of the market, the optimal design uses a tax-like mechanism, introducing a wedge between the buyer and seller prices, and redistributing the resulting surplus to the poorer side of the market via lump-sum payments. When there is significant within-side inequality, meanwhile, it may be optimal to impose price controls even though doing so induces rationing.
    JEL: D61 D63 D82 H21
    Date: 2018–11
  6. By: Hakimov, Rustamdjan (WZB Berlin); Kübler, Dorothea (WZB Berlin)
    Abstract: The paper surveys the experimental literature on matching markets. It covers house allocation, school choice, and two-sided matching markets such as college admissions. The main focus of the survey is on truth-telling and strategic manipulations by the agents, on the stability and efficiency of the matching outcome, as well as on the distribution of utility.
    Keywords: experiments; matching markets; survey;
    JEL: C92 D83
    Date: 2019–04–30
  7. By: Seiji Takanashi; Takehiro Kawasaki; Taiki Todo; Makoto Yokoo
    Abstract: In this paper, we study efficiency in truthful auctions via a social network, where a seller can only spread the information of an auction to the buyers through the buyers' network. In single-item auctions, we show that no mechanism is strategy-proof, individually rational, efficient, and weakly budget balanced. In addition, we propose $\alpha$-APG mechanisms, a class of mechanisms which operate a trade-off between efficiency and weakly budget balancedness. In multi-item auctions, there already exists a strategy-proof mechanism when all buyers need only one item. However, we indicate a counter-example to strategy-proofness in this mechanism, and to the best of our knowledge, the question of finding a strategy-proof mechanism remains open. We assume that all buyers have decreasing marginal utility and propose a generalized APG mechanism that is strategy-proof and individually rational but not efficient. Importantly, we show that this mechanism achieves the largest efficiency measure among all strategy-proof mechanisms.
    Date: 2019–04
  8. By: Zhang, Hanzhe (Michigan State University, Department of Economics)
    Abstract: A seller chooses to either post a price or run a reserve-price auction each period to sell a good before a deadline. Buyers with independent private values arrive over time. Assume that an auction costs more to the seller than a posted price. For a wide range of auction costs, the profit-maximizing mechanism sequence is to post prices first and then to run auctions. The optimality of the prices-then-auctions mechanism sequence provides a new justification for the use of the buy-it-now selling format on eBay.
    Keywords: buy-it-now; posted price; reserve price auction
    JEL: D44
    Date: 2019–04–24
  9. By: Vishnu V. Narayan; Enguerrand Prebet; Adrian Vetta
    Abstract: The declining price anomaly states that the price weakly decreases when multiple copies of an item are sold sequentially over time. The anomaly has been observed in a plethora of practical applications. On the theoretical side, Gale and Stegeman proved that the anomaly is guaranteed to hold in full information sequential auctions with exactly two buyers. We prove that the declining price anomaly is not guaranteed in full information sequential auctions with three or more buyers. This result applies to both first-price and second-price sequential auctions. Moreover, it applies regardless of the tie-breaking rule used to generate equilibria in these sequential auctions. To prove this result we provide a refined treatment of subgame perfect equilibria that survive the iterative deletion of weakly dominated strategies and use this framework to experimentally generate a very large number of random sequential auction instances. In particular, our experiments produce an instance with three bidders and eight items that, for a specific tie-breaking rule, induces a non-monotonic price trajectory. Theoretic analyses are then applied to show that this instance can be used to prove that for every possible tie-breaking rule there is a sequential auction on which it induces a non-monotonic price trajectory. On the other hand, our experiments show that non-monotonic price trajectories are extremely rare. In over six million experiments only a 0.000183 proportion of the instances violated the declining price anomaly.
    Date: 2019–05
  10. By: Duffie, Darrell (Graduate School of Business, Stanford University)
    Abstract: This note explains a new type of auction based on an existing derivatives risk-management technique known as “compression.†A compression auction can be used to convert centrally cleared contracts on an underlying benchmark, such as the London Interbank Offered Rate (LIBOR), to contracts on a different underlying benchmark, such as the Secured Overnight Financing Rate (SOFR). I first proposed compression-auctions for this purpose in October, 2017.
    Date: 2018–09
  11. By: Le Coq, Chloe (Stockholm Institute of Transition Economics); Schwenen, Sebastian (Technical University of Munich (School of Management))
    Abstract: We study the use of fi nancial contracts as bid-coordinating device in multi-unit uniform price auctions. Coordination is required whenever firms face a volunteer's dilemma in pricing strategies: one firm (the "volunteer") is needed to increase the market clearing price. Volunteering, however, is costly, as inframarginal suppliers sell their entire capacity whereas the volunteer only sells residual demand. We identify conditions under which signing financial contracts solves this dilemma. We test our framework exploiting data on contract positions by large producers in the New York power market. Using a Monte Carlo simulation, we show that the contracting strategy is payoff dominant and provide estimates of the benefits of such strategy.
    Keywords: Auctions; Coordination; Volunteers dilemma; Forward markets; power market
    JEL: D21 D44 L41
    Date: 2019–04–24
  12. By: Rahul Deb; Mallesh M. Pai; Maher Said
    Abstract: We develop a dynamic adverse selection model where a career-concerned buy-side analyst advises a fund manager about investment decisions. The analyst's ability is privately known, as is any information she learns over time. The manager wants to elicit information to maximize fund performance while also identifying and retaining high-skill analysts. We characterize the optimal dynamic contract, show that it has several features supported by empirical evidence, and derive novel testable implications. The fund manager's optimal contract both maximizes the value of information and screens out low-skill analysts by incentivizing the analyst to always provide honest advice.
    Keywords: buy-side analysts, career concerns, analyst recommendations, forecasting, dynamic mechanism design
    JEL: D82 D83 D86 G11 G14 G23
    Date: 2019
  13. By: Christoph Schottmüller
    Abstract: This paper analyzes the welfare maximizing information structure (and mechanism) in a bilateral trade setting. The welfare loss in the optimal information structure constitutes the minimal welfare loss due to asymmetric information. With binary underlying types it is shown that more than 95% of first best welfare can be achieved while the optimal mechanism without information design may achieve less than 90% of first best welfare. For more general type distributions, the optimal information structure is a monotone partition of the type space and the optimal mechanism is deterministic. A closed form solution is derived for the binary type case.
    Date: 2019–04–23
  14. By: Stamatopoulos, Giorgos
    Abstract: We introduce a novel commodity tax mechanism in oligopolies that improves upon the standard tax policies. The government (i) announces an excise tax rate $\tau$ and (ii) auctions-off a number of tax exemptions. Namely, it invites the firms in a market to acquire the right to be exempted from the excise tax. The highest bidders are exempted paying the government their bids; and all other firms remain subject to $\tau$. Depending on the characteristics of the market, the mechanism we suggest has a number of desirable features. First, it allows the government to collect more revenues than the standard commodity tax policies (this is due to the competition among the firms to acquire the exemptions). Second, for markets where firms have informational advantage over the government, the mechanism allows for information revelation (via the firms' bids in the auction). Third, it impedes collusive activities in the market (as the mechanism creates an artificial asymmetry among the firms, which hinders collusion). Lastly, the mechanism is voluntary, namely the firms participate in the auction only if they wish and hence they are free to choose how to be taxed.
    Keywords: excise tax; tax exemption; auction; asymmetric information; collusion
    JEL: H21 H25 L1
    Date: 2019–05–01

This nep-des issue is ©2019 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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