nep-des New Economics Papers
on Economic Design
Issue of 2019‒05‒27
eight papers chosen by
Alex Teytelboym
University of Oxford

  1. A Perfectly Robust Approach to Multiperiod Matching Problems By Kotowski, Maciej
  2. Stability against Robust Deviations in the Roommate Problem By Hirata, Daisuke; Kasuya, Yusuke; Tomoeda, Kentaro
  3. Will the Market Fix the Market? A Theory of Stock Exchange Competition and Innovation By Eric Budish; Robin S. Lee; John J. Shim
  4. Empirical bias of extreme-price auctions: analysis By Rodrigo A. Velez; Alexander L. Brown
  5. Spite vs. risk: explaining overbidding By Oliver Kirchkamp; Wladislaw Mill
  6. Entry and competition in takeover auctions By Gentry, Matthew; Stroup, Caleb
  7. Driver Surge Pricing By Nikhil Garg; Hamid Nazerzadeh
  8. Tournament Rewards and Heavy Tails By Mikhail Drugov; Dmitry Ryvkin

  1. By: Kotowski, Maciej (Harvard Kennedy School)
    Abstract: Many two-sided matching situations involve multiperiod interaction. Traditional cooperative solutions, such as stability and the core, often identify unintuitive outcomes (or are empty) when applied to such markets. As an alternative, this study proposes the criterion of perfect alpha-stability. An outcome is perfect alpha-stable if no coalition prefers an alternative assignment in any period that is superior for all plausible market continuations. Behaviorally, the solution combines foresight about the future and a robust evaluation of contemporaneous outcomes. A perfect alpha-stable matching exists, even when preferences exhibit inter-temporal complementarities. A stronger solution, the perfect alpha-core, is also investigated. Extensions to markets with arrivals and departures, transferable utility, and many-to-one assignments are proposed.
    JEL: C71 C78
    Date: 2019–05
  2. By: Hirata, Daisuke; Kasuya, Yusuke; Tomoeda, Kentaro
    Abstract: We propose a new solution concept in the roommate problem, based on the "robustness" of deviations (i.e., blocking coalitions). We call a deviation from a matching robust up to depth k, if none of the deviators gets worse off than at the original matching after any sequence of at most k subsequent deviations. We say that a matching is stable against robust deviations (for short, SaRD) up to depth k, if there is no robust deviation up to depth k. As a smaller k imposes a stronger requirement for a matching to be SaRD, we investigate the existence of a matching that is SaRD with a minimal depth k. We constructively demonstrate that a SaRD matching always exists for k=3, and establish sufficient conditions for k=1 and 2.
    Date: 2019–05
  3. By: Eric Budish; Robin S. Lee; John J. Shim
    Abstract: Will the market adopt new market designs that address the negative aspects of high-frequency trading? This paper builds a theoretical model of stock exchange competition, shaped by institutional and regulatory details of the U.S. equities market. We show that under the status quo market design: (i) trading behavior across the many distinct exchanges is as if there is just a single “synthesized” exchange; (ii) as a result, trading fees are perfectly competitive; but (iii) exchanges capture and maintain significant economic rents from the sale of “speed technology” (i.e., proprietary data feeds and co-location)—arms for the high-frequency trading arms race. Using a variety of data, we document seven stylized empirical facts that suggest that the model captures the essential economics of how U.S. stock exchanges compete and make money in the modern era. We then use the model to examine the private and social incentives for market design innovation. We find that while the social returns to market design innovation are large, the private returns are much smaller and may be negative, especially for incumbents that derive rents in the status quo from selling speed technology.
    JEL: D02 D44 D53 D82 G1 G2 G23 L1 L13 L5 L89
    Date: 2019–05
  4. By: Rodrigo A. Velez; Alexander L. Brown
    Abstract: We advance empirical equilibrium analysis (Velez and Brown, 2019) of the winner-bid and loser-bid auctions for the dissolution of a partnership. We show, in a complete information environment, that even though these auctions are essentially equivalent for the Nash equilibrium prediction, they can be expected to differ in fundamental ways when they are operated. Besides the direct policy implications, two general consequences follow. First, a mechanism designer who accounts for the empirical plausibility of equilibria may not be constrained by Maskin invariance. Second, a mechanism designer who does not account for the empirical plausibility of equilibria may inadvertently design biased mechanisms.
    Date: 2019–05
  5. By: Oliver Kirchkamp; Wladislaw Mill
    Abstract: In this paper we use an experiment to compare a theory of risk aversion and a theory of spite as an explanation for overbidding in auctions. As a workhorse we use the second-price all-pay and the first-price winner-pay auction. Both risk and spite can be used to rationalize deviations from risk neutral equilibrium bids in auctions. We exploit that equilibrium predictions in the second-price all-pay auctions for spiteful preferences are different than those for risk averse preferences. Indeed, we find that spite is a more convincing explanation for bidding behavior for the second-price all-pay auction. Not only can spite rationalize observed bids, also our measure for spite is consistent with observed bids.
    Keywords: auction, overbidding, spite, risk, experiment
    JEL: C91 C72 D44 D91
    Date: 2019
  6. By: Gentry, Matthew; Stroup, Caleb
    Abstract: We estimate the degree of uncertainty faced by potential bidders in takeover auctions and quantify how it affects prices in auctions and negotiations. The high degree of uncertainty revealed by our structural estimation encourages entry in auctions but reduces a target’s bargaining power in negotiations. In the aggregate, auctions and negotiations produce similar prices, even though auctions are preferred in takeover markets with high uncertainty, while the reverse is true for negotiations. Firm characteristics predict pre-entry uncertainty and thus are informative about the relative performance of auctions and negotiations for individual targets.
    JEL: G0
    Date: 2018–11–13
  7. By: Nikhil Garg; Hamid Nazerzadeh
    Abstract: Uber and Lyft ride-hailing marketplaces use dynamic pricing, often called surge, to balance the supply of available drivers with the demand for rides. We study pricing mechanisms for such marketplaces from the perspective of drivers, presenting the theoretical foundation that has informed the design of Uber's new additive driver surge mechanism. We present a dynamic stochastic model to capture the impact of surge pricing on driver earnings and their strategies to maximize such earnings. In this setting, some time periods (surge) are more valuable than others (non-surge), and so trips of different time lengths vary in the opportunity cost they impose on drivers. First, we show that multiplicative surge, historically the standard on ride-hailing platforms, is not incentive compatible in a dynamic setting. We then propose a structured, incentive-compatible pricing mechanism. This closed-form mechanism has a simple form, and is well-approximated by Uber's new additive surge mechanism.
    Date: 2019–05
  8. 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

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