nep-des New Economics Papers
on Economic Design
Issue of 2019‒10‒28
six papers chosen by
Alex Teytelboym
University of Oxford

  1. Heuristic and Equilibrium Strategies in Premium Auctions By Dejan Trifunovic
  2. Nonparametric identification of an interdependent value model with buyer covariates from first-price auction bids By Nathalie Gimenes; Emmanuel Guerre
  3. Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms By Bnaya Dreyfuss; Ori Heffetz; Matthew Rabin
  4. What are the best quorum rules? A laboratory Investigation By Aguiar-Conraria, Luís; Magalhães, Pedro C.; Vanberg, Christoph A.
  5. Optimal Quality Certification By Andriy Zapechelnyuk

  1. By: Dejan Trifunovic (Faculty of Economics, University of Belgrade)
    Abstract: Premium auctions are conducted in two stages. In the first stage bidders compete in English auction until two bidders remain. The two finalists enter the second stage where they compete in a first-price sealed bid auction (Amsterdam auction) or in another English auction (Antwerp auction). The winner and the runner up obtain the premium that is proportional to the difference between the runner up?s bid and the highest losing bid in the first stage. We compare the equilibrium bidding strategy of the two finalists with the three heuristic strategies when bidders have private values in Amsterdam auction. With the first heuristic strategy, each finalist believes that he will lose in the second stage and that his bid determines the amount of the premium. With the second heuristic strategy, each finalist is optimistic and has second-order belief that the other finalist is pessimistic. With the third heuristic strategy, both finalists are optimistic and have second-order belief that the other finalist is optimistic.The simulation analysis with symmetric bidders shows that the average increase of bid of the runner up relative to the equilibrium bid is the largest with the second heuristic strategy, followed by the third and the first, respectively. The premium with either heuristic strategy is larger than with the equilibrium strategy. The profit of the winner is larger than the equilibrium profit, while seller?s revenue is lower than in equilibrium. The same conclusions hold for strongly asymmetric bidders. The use of heuristic strategies could be considered as a form of tacit collusion between two finalists, and with symmetric bidders who use the first heuristic strategy, the tacit collusion is stable even in a one-shot game.
    Keywords: Hybrid auctions, Amsterdam auction, Antwerp auction, perfect Bayesian equilibrium, heuristic strategies
    JEL: D44
    Date: 2019–10
  2. By: Nathalie Gimenes; Emmanuel Guerre
    Abstract: This paper introduces a version of the interdependent value model of Milgrom and Weber (1982), where the signals are given by an index gathering signal shifters observed by the econometrician and private ones specific to each bidders. The model primitives are shown to be nonparametrically identified from first-price auction bids under a testable mild rank condition. Identification holds for all possible signal values. This allows to consider a wide range of counterfactuals where this is important, as expected revenue in second-price auction. An estimation procedure is briefly discussed.
    Date: 2019–10
  3. By: Bnaya Dreyfuss; Ori Heffetz; Matthew Rabin
    Abstract: Deferred Acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that—in both real, large-stakes applications and experiments—participants frequently play seemingly dominated, significantly costly, strategies that avoid small chances of good outcomes. We show theoretically why, with expectations-based loss aversion, this behavior may be partly intentional. Reanalyzing existing experimental data on random serial dictatorship (a restriction of DA), we show that such reference-dependent preferences, with a degree and distribution of loss aversion that explain common levels of risk aversion elsewhere, fit the data better than no-loss-aversion preferences.
    JEL: B49 D47 D82 D84 D91
    Date: 2019–10
  4. By: Aguiar-Conraria, Luís; Magalhães, Pedro C.; Vanberg, Christoph A.
    Abstract: Many political systems with direct democracy mechanisms have adopted rules preventing decisions from being made by simple majority rule. The device most commonly added to majority rule in national is a quorum requirement. The two most common are the participation and the approval quora. Such rules are a response to three major concerns: the legitimacy of the referendum outcome, its representativeness (the concern with the outcome representing the will of the whole electorate), and protection of minorities regarding issues that should demand a broad consensus. Guided by a pivotal voter model, we conduct a laboratory experiment to investigate the performance of different quora in reaching such goals. We introduce two main innovations in relation to previous work on the topic. First, part of the electorate goes to the polls out of a sense of civic duty. Second, we test the performance of a different quorum, the rejection quorum, recently proposed in the literature. We conclude that, depending on the preferred criterion, either the approval or the rejection quorum is to be preferred.
    Keywords: election design; participation quorum; approval quorum; laboratory experiment
    Date: 2019–10–16
  5. By: Andriy Zapechelnyuk (University of St Andrews)
    Abstract: Quality certification not only informs consumers, but also stimulates producers to supply better quality products. We study a problem of quality certification in a moral hazard setting. We show that, under standard assumptions, simple certification systems, such as quality assurance rule and pass-fail rule, are optimal. Our solution method involves interpreting the certification problem as a delegation problem.
    Keywords: Certification, Bayesian persuasion, information disclosure, information design, delegation, moral hazard, career concerns
    JEL: D82 D86 D45
    Date: 2019–10–21
  6. By: Maksim Gladyshev (National Research University Higher School of Economics)
    Abstract: Correct aggregation of individual preferences into collective one is central problem of nowadays Social Choice theory. After the Arrow’s and Gibbard–Satterthwaite impossibility theorems it became clear that our desire to justify an electoral procedure is doomed to failure. At the same time a lot of scholars continued exploring different properties of existing voting rules and constructing the new ones. Contemporary research in this area explore two main properties of aggregation procedures — their degree of manipulability and computational complexity of manipulation. Quantitative evaluations of these properties tend to be main criteria of voting procedure selection. But last decades it turned out that another threat for theory of voting is incompatibilities and unexpected outcomes of different kind, usually called paradoxes. This article provides complete systematization of voting paradoxes known for today. We also presented an attempt to formulate a complete proof of the (in)stability of seven most common used voting rules to paradoxes of any type, which had not been undertaken before. Our results show that different voting procedures are qualitatively different in the sense of vulnerability to voting paradoxes which makes reasonable to propose additional criteria of voting procedure selection and opens the gate for further quantitative research.
    Keywords: Social choice, elections, voting behavior, paradoxes, voting procedures
    JEL: D7
    Date: 2019

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