nep-des New Economics Papers
on Economic Design
Issue of 2019‒08‒26
twelve papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Fairness and efficiency for probabilistic allocations with endowments By Federico Echenique; Antonio Miralles; Jun Zhang
  2. Serial Dictatorship Mechanisms with Reservation Prices By Bettina Klaus; Alexandru Nichifor
  3. Fair Division with Minimal Sharing By Fedor Sandomirskiy; Erel Segal-Halevi
  4. Why Finnish polytechnics reject top applicants By Kristian Koerselman
  5. Empirical strategy-proofness By Rodrigo A. Velez; Alexander L. Brown
  6. Probabilistic Verification in Mechanism Design By Ian Ball; Deniz Kattwinkel
  7. Nonparametric Identification of First-Price Auction with Unobserved Competition: A Density Discontinuity Framework By Emmanuel Guerre; Yao Luo
  8. On Selecting the Right Agent By de Clippel, Geoffroy; Eliaz, Kfir; Fershtman, Daniel; Rozen, Kareen
  9. Progressive Participation By Dirk Bergemann; Philipp Strack
  10. Information Design with Agency By Bizzotto, Jacopo; Perez-Richet, Eduardo; Vigier, Adrien
  11. Correct Me If You Can - Optimal Non-Linear Taxation of Internalities By Andreas Gerster; Michael Kramm
  12. Nonlinear Pricing with Average-Price Bias By Martimort, David; Stole, Lars

  1. By: Federico Echenique; Antonio Miralles; Jun Zhang
    Abstract: We propose a notion of fairness for allocation problems in which different agents may have different endowments. Fairness is usually understood as the absence of envy, but when agents differ in endowments it is impossible to rule out envy without violating property rights. Instead we seek to rule out {\em justified envy}, defined as envy for which the remedy would not violate any agent's property rights. We show that fairness, meaning the absence of justified envy, can be achieved together with efficiency and individual rationality (respect for property rights). Our approach requires standard assumptions on agents' preferences, and is compatible with quantity constraints on allocations. The main application of our results is to school choice, where we can simultaneously achieve fairness, efficiency, and diversity-motivated quantity constraints.
    Date: 2019–08
  2. By: Bettina Klaus; Alexandru Nichifor
    Abstract: We propose a new set of mechanisms, which we call serial dictatorship mechanisms with individual reservation prices for the allocation of homogeneous indivisible objects, e.g., specialist clinic appointments. We show that a mechanism ' satis es minimal tradability,individual rationality, strategy-proofness, consistency, independence of unallocated objects, and non wasteful tie-breaking if and only if there exists a reservation price vector r and a priority ordering such that ' is a serial dictatorship mechanism with reservation prices based on r and . We obtain a second characterization by replacing individual rationality with non-imposition. In both our characterizations r, , and 'are all found simultaneously and endogenously from the properties. Finally, we illustrate how our model, mechanism, and results, capture the normative requirements governing the functioning of some real life markets and the mechanisms that these markets use.
    Keywords: serial dictatorship; individual reservation prices; strategy-proofness; consistency.
    JEL: C78 D71
    Date: 2019–08
  3. By: Fedor Sandomirskiy; Erel Segal-Halevi
    Abstract: A set of objects, some goods and some bads, is to be divided fairly among agents with different tastes, modeled by additive utility-functions. If the objects cannot be shared, so that each of them must be entirely allocated to a single agent, then fair division may not exist. What is the smallest number of objects that must be shared between two or more agents in order to attain a fair division? We focus on Pareto-optimal, envy-free and/or proportional allocations. We show that, for a generic instance of the problem --- all instances except of a zero-measure set of degenerate problems --- a fair and Pareto-optimal division with the smallest possible number of shared objects can be found in polynomial time, assuming that the number of agents is fixed. The problem becomes computationally hard for degenerate instances, where the agents' valuations are aligned for many objects.
    Date: 2019–08
  4. By: Kristian Koerselman
    Abstract: I use a panel of higher education clearinghouse data to study the centralized assignment of applicants to Finnish polytechnics. I show that on a yearly basis, large numbers of top applicants unnecessarily remain unassigned to any program. There are programs which rejected applicants would find acceptable, but the assignment mechanism both discourages applicants from applying, and stops programs from admitting those who do. A mechanism which would admit each year's most eligible applicants has the potential to substantially reduce re-applications, thereby shortening the long queues into Finnish higher education.
    Date: 2019–08
  5. By: Rodrigo A. Velez; Alexander L. Brown
    Abstract: We study the plausibility of sub-optimal Nash equilibria of the direct revelation mechanism associated with a strategy-proof social choice function. By using the recently introduced empirical equilibrium analysis (Velez and Brown, 2019, arXiv:1804.07986) we determine that this behavior is plausible only when the social choice function violates a non-bossiness condition and information is not interior. Analysis of the accumulated experimental and empirical evidence on these games supports our findings.
    Date: 2019–07
  6. By: Ian Ball; Deniz Kattwinkel
    Abstract: We introduce a model of probabilistic verification in a mechanism design setting. The principal verifies the agent's claims with statistical tests. The agent's probability of passing each test depends on his type. In our framework, the revelation principle holds. We characterize whether each type has an associated test that best screens out all the other types. In that case, the testing technology can be represented in a tractable reduced form. In a quasilinear environment, we solve for the revenue-maximizing mechanism by introducing a new expression for the virtual value that encodes the effect of testing.
    Date: 2019–08
  7. By: Emmanuel Guerre; Yao Luo
    Abstract: We consider nonparametric identification of independent private value first-price auction models, in which the analyst only observes winning bids. Our benchmark model assumes an exogenous number of bidders $N$. We show that, if the bidders observe $N$, the resulting discontinuities in the winning bid density can be used to identify the distribution of $N$. The private value distribution can be identified in a second step. A second class of models considers endogenously-determined $N$, due to a reserve price or an entry cost. If bidders observe $N$, these models are also identifiable using winning bid discontinuities. If bidders cannot observe $N$, however, identification is not possible unless the analyst observes an instrument which affects the reserve price or entry cost. Lastly, we derive some testable restrictions for whether bidders observe the number of competitors and whether endogenous participation is due to a reserve price or entry cost. An application to USFS timber auction data illustrates the usefulness of our theoretical results for competition analysis, showing that nearly one bid out of three can be non competitive. It also suggests that the risk aversion bias caused by a mismeasured competition can be large.
    Date: 2019–08
  8. By: de Clippel, Geoffroy; Eliaz, Kfir; Fershtman, Daniel; Rozen, Kareen
    Abstract: Each period, a principal must assign one of two agents to some task. Profit is stochastically higher when the agent is qualified for the task. The principal cannot observe qualification. Her only decision is which of the two agents to assign, if any, given the public history of selections and profits. She cannot commit to any rule. While she maximizes expected discounted profits, each agent maximizes his expected discounted selection probabilities. We fully characterize when the principal's first-best payoff is attainable in equilibrium, and identify a simple strategy profile achieving this first-best whenever feasible. We propose a new refinement for dynamic mechanisms (without transfers) where the designer is a player, under which we show the principal's next-best, when the first-best is unachievable, is the one-shot Nash. We show how our analysis extends to variations on the game accommodating more agents, caring about one's own performance, cheap talk and losses.
    Keywords: dynamic allocation; mechanism design without commitment; mechanism design without transfers
    Date: 2019–07
  9. By: Dirk Bergemann (Cowles Foundation, Yale University); Philipp Strack (Cowles Foundation, Yale University)
    Abstract: A single seller faces a sequence of buyers with unit demand. The buyers are forward-looking and long-lived but vanish (and are replaced) at a constant rate. The arrival time and the valuation is private information of each buyer and unobservable to the seller. Any incentive-compatible mechanism has to induce truth-telling about the arrival time and the evolution of the valuation. We derive the optimal stationary mechanism, characterize its qualitative structure and derive a closed-form solution. As the arrival time is private information, the agent can choose the time at which he reports his arrival. The truth-telling constraint regarding the arrival time can be represented as an optimal stopping problem. The stopping time determines the time at which the agent decides to participate in the mechanism. The resulting value function of each agent can not be too convex and has to be continuously differentiable everywhere, reflecting the option value of delaying participation. The optimal mechanism thus induces progressive participation by each agent: he participates either immediately or at a future random time.
    Keywords: Dynamic Mechanism Design, Observable Arrival, Unobservable Arrival, Repeated Sales, Interim Incentive Constraints, Interim Participation Constraints, Stopping Problem, Option Value, Progressive Participation
    JEL: D44 D82 D83
    Date: 2019–08
  10. By: Bizzotto, Jacopo; Perez-Richet, Eduardo; Vigier, Adrien
    Abstract: We consider a general information design problem in which the task of producing information is delegated to an agent who can privately choose between the procedure designed by the principal and a default procedure. Procedures are constrained as to which messages they use, and possibly how they may be used. The principal can incentivize the agent via transfers conditioned on messages. This gives rise to a moral hazard problem in which the principal faces a trade-off between generating information that is persuasive in the continuation game, or generating information about the choice of the agent so as to lower the cost of agency. We provide a general methodology to solve such problems, and characterize an optimal procedure. We apply our results to information acquisition and persuasion examples.
    Keywords: Agency Cost; Information Acquisition; information design; moral hazard
    JEL: C72 D82
    Date: 2019–07
  11. By: Andreas Gerster; Michael Kramm
    Abstract: A growing literature has shown that behavioral biases influence consumer choices. Such so-called internalities are ubiquitous in many settings, including energy efficiency investments and the consumption of sin goods, such as cigarettes and sugar. In this paper, we use a mechanism design approach to characterize the optimal non-linear tax (or subsidy) for correcting behaviorally biased consumers. We demonstrate that market choices are informative about consumers’ bias, which can be exploited for benevolent price discrimination via a non-linear tax schedule. We derive that such “internality revelation” depends on two sufficient statistics: the correlation between valuations and biases, as well as the signal-to-noise ratio of the bias. Furthermore, we find that there must be a minimum alignment of preferences among the designer and the consumer to ensure internality tax implementability. We contrast our results with the insights from standard non-linear income taxation and discuss that the optimal corrective tax schedule is typically convex. In addition, we apply our findings to the light bulb market and determine the optimal non-linear subsidy for energy efficiency.
    Keywords: optimal commodity taxation, non-linear taxation, behavioral economics, public economics, internalities, environmental economics
    JEL: H21 D82 D04 Q58
    Date: 2019
  12. By: Martimort, David; Stole, Lars
    Abstract: Empirical evidence suggests that consumers facing complex nonlinear pricing often make choices based on average (not marginal) prices. Given such behavior, we characterize a monopolist's optimal nonlinear price schedule. In contrast to the textbook setting, nonlinear prices designed for ``average-price bias'' distort consumption downward for consumers at the top, may produce efficient consumption for consumers at the bottom, and typically feature quantity premia rather than quantity discounts. These properties arise because the bias replaces consumer information rents with curvature rents. Whether or not a monopolist prefers consumers with average-price bias depends upon underlying preferences and costs.
    Keywords: average-price bias; curvature rents; Nonlinear Pricing; price discrimination
    JEL: D82
    Date: 2019–07

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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