
on Economic Design 
By:  Ludvig Sinander 
Abstract:  I prove an envelope theorem with a converse: the envelope formula is equivalent to a firstorder condition. Like Milgrom and Segal's (2002) envelope theorem, my result requires no structure on the choice set. I use the converse envelope theorem to extend to abstract outcomes the canonical result in mechanism design that any increasing allocation is implementable, and apply this to selling information. 
Date:  2019–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1909.11219&r=all 
By:  Flip Klijn; Joana Pais; Marc Vorsatz 
Abstract:  In the context of school choice, we experimentally study the studentoptimal stable mechanism where subjects take the role of students and schools are passive. Specifically, we study if a school can be better off when it unambiguously improves in the students’ true preferences and its (theoretic) studentoptimal stable match remains the same or gets worse. Using firstorder stochastic dominance to evaluate the schools’ distributions over their actual matches, we find that schools’ welfare almost always changes in the same direction as the change of the studentoptimal stable matching, i.e., incentives to improve school quality are nearly idle. 
Keywords:  school choice, matching, deferred acceptance, school quality, stability 
JEL:  C78 C91 C92 D78 I20 
Date:  2019–09 
URL:  http://d.repec.org/n?u=RePEc:bge:wpaper:1119&r=all 
By:  Tao Zhang; Quanyan Zhu 
Abstract:  This paper studies dynamic mechanism design in a quasilinear Markovian environment and analyzes a direct mechanism model of a principalagent framework in which the agent is allowed to exit at any period. We consider that the agent's private information, referred to as state, evolves over time. The agent makes decisions of whether to stop or continue and what to report at each period. The principal, on the other hand, chooses decision rules consisting of an allocation rule and a set of payment rules to maximize her exante expected payoff. In order to influence the agent's stopping decision, one of the terminal payment rules is postedprice, i.e., it depends only on the realized stopping time of the agent. We define the incentive compatibility in this dynamic environment in terms of Bellman equations, which is then simplified by establishing a oneshot deviation principle. Given the optimality of the stopping rule, a sufficient condition for incentive compatibility is obtained by constructing the statedependent payment rules in terms of a set of functions parameterized by the allocation rule. A necessary condition is derived from envelope theorem, which explicitly formulates the statedependent payment rules in terms of allocation rules. A class of monotone environment is considered to characterize the optimal stopping by a threshold rule. The postedprice payment rules are then pinned down in terms of the allocation rule and the threshold function up to a constant. The incentive compatibility constraints restrict the design of the postedprice payment rule by a regular condition. 
Date:  2019–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1909.13720&r=all 
By:  Moshe Babaioff; Uriel Feige 
Abstract:  We consider transferableutility profitsharing games that arise from settings in which agents need to jointly choose one of several alternatives, and may use transfers to redistribute the welfare generated by the chosen alternative. One such setting is the SharedRental problem, in which students jointly rent an apartment and need to decide which bedroom to allocate to each student, depending on the student's preferences. Many solution concepts have been proposed for such settings, ranging from mechanisms without transfers, such as Random Priority and the Eating mechanism, to mechanisms with transfers, such as envy free solutions, the Shapley value, and the KalaiSmorodinsky bargaining solution. We seek a solution concept that satisfies three natural properties, concerning efficiency, fairness and decomposition. We observe that every solution concept known (to us) fails to satisfy at least one of the three properties. We present a new solution concept, designed so as to satisfy the three properties. A certain submodularity condition (which holds in interesting special cases such as the SharedRental setting) implies both existence and uniqueness of our solution concept. 
Date:  2019–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1909.11346&r=all 
By:  Christian Kroer; Alexander Peysakhovich 
Abstract:  Allocating multiple scarce items across a set of individuals is an important practical problem. In the case of divisible goods and additive preferences a convex program can be used to find the solution that maximizes Nash welfare (MNW). The MNW solution is equivalent to finding the equilibrium of a market economy (aka. the competitive equilibrium from equal incomes, CEEI) and thus has good properties such as Pareto optimality, envyfreeness, and incentive compatibility in the large. Unfortunately, this equivalence (and nice properties) breaks down for general preference classes. Motivated by real world problems such as course allocation and recommender systems we study the case of additive `at most one' (AMO) preferences  individuals want at most 1 of each item and lotteries are allowed. We show that in this case the MNW solution is still a convex program and importantly is a CEEI solution when the instance gets large but has a `low rank' structure. Thus a polynomial time algorithm can be used to scale CEEI (which is in general PPADhard) for AMO preferences. We examine whether the properties guaranteed in the limit hold approximately in finite samples using several real datasets. 
Date:  2019–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1909.10925&r=all 
By:  Vasilios Mavroudis; Hayden Melton 
Abstract:  While historically, economists have been primarily occupied with analyzing the behaviour of the markets, electronic trading gave rise to a new class of unprecedented problems associated with market fairness, transparency and manipulation. These problems stem from technical shortcomings that are not accounted for in the simple conceptual models used for theoretical market analysis. They, thus, call for more pragmatic market design methodologies that consider the various infrastructure complexities and their potential impact on the market procedures. First, we formally define temporal fairness and then explain why it is very difficult for ordermatching policies to ensure it in continuous markets. Subsequently, we introduce a list of system requirements and evaluate existing "fair" market designs in various practical and adversarial scenarios. We conclude that they fail to retain their properties in the presence of infrastructure inefficiencies and sophisticated technical manipulation attacks. Based on these findings, we then introduce Libra, a "fair" policy that is resilient to gaming and tolerant of technical complications. Our security analysis shows that it is significantly more robust than existing designs, while Libra's deployment (in a live foreign currency exchange) validated both its considerably low impact on the operation of the market and its ability to reduce speedbased predatory trading. 
Date:  2019–10 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1910.00321&r=all 
By:  Shachat, Jason; Tan, Lijia 
Abstract:  We compare two commonly used procurement English auction formats  the exante reserve price and the expost reserve price, with symmetric and independently distributed private costs. Both formats are indirect implementations of Myerson's optimal mechanism. Both formats yield the same ex post payoffs when auctioneers optimally choose reserve prices. However, the optimal reserve prices follow two counterintuitive prescriptions: optimal exante reserve prices do not vary with the number of bidders, and optimal expost reserve prices are invariant to the realized auction prices. Anticipated regret, Davis et al (2011), and subjective posterior probability judgement, Shachat and Tan (2015), are two different approaches to rationalize observed auctioneers' choices that violate the two counterintuitive prescriptions respectively. We generalized the latter model to one of Subjective Conditional Probabilities (SCP) which predicts optimal exante reserve prices decreasing in the number of bidders and also predicts optimal expost reserve prices increasing in the realized auction prices. In our first experiment, in which costs follow a uniform distribution, we find two possible explanations to the experimental results. First, the auctioneers use the SCP model for both formats. Second, they use formatspecific models. In our second experiment with a leftskewed cost distribution, we finally find that the SCP provides a unified behavioral model of how auctioneer set reserve prices in the two formats. 
Keywords:  Procurement; English auction; exante reserve price; expost reserve price; anticipated regret; subjective conditional probability 
JEL:  C34 C91 D03 D44 
Date:  2019–09–28 
URL:  http://d.repec.org/n?u=RePEc:pra:mprapa:96225&r=all 
By:  Jun Ma; Vadim Marmer; Artyom Shneyerov; Pai Xu 
Abstract:  We propose a new nonparametric estimator for firstprice auctions with independent private values that imposes the monotonicity constraint on the estimated inverse bidding strategy. We show that our estimator has a smaller asymptotic variance than that of Guerre, Perrigne and Vuong's (2000) estimator. In addition to establishing pointwise asymptotic normality of our estimator, we provide a bootstrapbased approach to constructing uniform confidence bands for the density function of latent valuations. 
Date:  2019–09 
URL:  http://d.repec.org/n?u=RePEc:arx:papers:1909.12974&r=all 
By:  Lana Friesen (School of Economics, The University of Queensland); Lata Gangadharan (Department of Economics, Monash University, Australia); Peyman Khezr (School of Economics, The University of Queensland); Ian A. MacKenzie (School of Economics, The University of Queensland) 
Abstract:  This article investigates supply reserves in pollution permit auctions. A supply reserve is a fixed quantity of permits that is automatically released if the initial clearing price is sufficiently high. The main rationale for using such a reserve is for cost containment: to lower the final clearing price. We show the inclusion of a reserve does exactly the opposite and provide corroborating experimental evidence. Relative to a benchmark without a supply reserve, we find that the introduction of a supply reserve will actually increase the clearing price, increase the revenue from the auction, and increase auction efficiency. The clearing price also increases in the level of the trigger price and relative size of the reserve. This has important implications for supply reserves currently in use, such as the Cost Containment Reserve (CCR) within the US Regional Greenhouse Gas Initiative (RGGI) 
Keywords:  multiunit auction; uniformprice; supply reserve, pollution permits, experiment. 
JEL:  C91 C92 Q58 
Date:  2019–09–20 
URL:  http://d.repec.org/n?u=RePEc:qld:uq2004:610&r=all 