nep-des New Economics Papers
on Economic Design
Issue of 2019‒10‒07
nine papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. The converse envelope theorem By Ludvig Sinander
  2. Improving Schools through School Choice: An Experimental Study of Deferred Acceptance By Flip Klijn; Joana Pais; Marc Vorsatz
  3. On Incentive Compatibility in Dynamic Mechanism Design With Exit Option in a Markovian Environment By Tao Zhang; Quanyan Zhu
  4. A New Approach to Fair Distribution of Welfare By Moshe Babaioff; Uriel Feige
  5. Scalable Fair Division for 'At Most One' Preferences By Christian Kroer; Alexander Peysakhovich
  6. Libra: Fair Order-Matching for Electronic Financial Exchanges By Vasilios Mavroudis; Hayden Melton
  7. How Auctioneers Set Ex-Ante and Ex-Post Reserve Prices in English Auctions By Shachat, Jason; Tan, Lijia
  8. Monotonicity-Constrained Nonparametric Estimation and Inference for First-Price Auctions By Jun Ma; Vadim Marmer; Artyom Shneyerov; Pai Xu
  9. Cost containment in pollution auctions By Lana Friesen; Lata Gangadharan; Peyman Khezr; Ian A. MacKenzie

  1. By: Ludvig Sinander
    Abstract: I prove an envelope theorem with a converse: the envelope formula is equivalent to a first-order 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
  2. By: Flip Klijn; Joana Pais; Marc Vorsatz
    Abstract: In the context of school choice, we experimentally study the student-optimal 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) student-optimal stable match remains the same or gets worse. Using first-order 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 student-optimal 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
  3. 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 principal-agent 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 ex-ante expected payoff. In order to influence the agent's stopping decision, one of the terminal payment rules is posted-price, 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 one-shot deviation principle. Given the optimality of the stopping rule, a sufficient condition for incentive compatibility is obtained by constructing the state-dependent 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 state-dependent payment rules in terms of allocation rules. A class of monotone environment is considered to characterize the optimal stopping by a threshold rule. The posted-price 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 posted-price payment rule by a regular condition.
    Date: 2019–09
  4. By: Moshe Babaioff; Uriel Feige
    Abstract: We consider transferable-utility profit-sharing 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 Shared-Rental 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 Kalai-Smorodinsky 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 Shared-Rental setting) implies both existence and uniqueness of our solution concept.
    Date: 2019–09
  5. 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, envy-freeness, 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 PPAD-hard) for AMO preferences. We examine whether the properties guaranteed in the limit hold approximately in finite samples using several real datasets.
    Date: 2019–09
  6. 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 order-matching 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 speed-based predatory trading.
    Date: 2019–10
  7. By: Shachat, Jason; Tan, Lijia
    Abstract: We compare two commonly used procurement English auction formats - the ex-ante reserve price and the ex-post 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 counter-intuitive prescriptions: optimal ex-ante reserve prices do not vary with the number of bidders, and optimal ex-post 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 counter-intuitive prescriptions respectively. We generalized the latter model to one of Subjective Conditional Probabilities (SCP) which predicts optimal ex-ante reserve prices decreasing in the number of bidders and also predicts optimal ex-post 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 format-specific models. In our second experiment with a left-skewed 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; ex-ante reserve price; ex-post reserve price; anticipated regret; subjective conditional probability
    JEL: C34 C91 D03 D44
    Date: 2019–09–28
  8. By: Jun Ma; Vadim Marmer; Artyom Shneyerov; Pai Xu
    Abstract: We propose a new nonparametric estimator for first-price 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 bootstrap-based approach to constructing uniform confidence bands for the density function of latent valuations.
    Date: 2019–09
  9. 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: multi-unit auction; uniform-price; supply reserve, pollution permits, experiment.
    JEL: C91 C92 Q58
    Date: 2019–09–20

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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