nep-des New Economics Papers
on Economic Design
Issue of 2020‒04‒06
four papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Mechanism Design with Blockchain Enforcement By Hitoshi Matsushima; Shunya Noda
  2. Power to Ignore: Locally Ordinal Bayesian Incentive Compatibility By Miho Hong; Semin Kim
  3. Controlling Monopoly Power in a Double-Auction Market Experiment By Giuseppe Attanasi; Kene Boun My; Andrea Guido; Mathieu Lefebvre
  4. Zero-Intelligence vs. Human Agents: An Experimental Analysis of the Efficiency of Double Auctions and Over-the-Counter Markets of Varying Sizes By Giuseppe Attanasi; Samuele Centorrino; Elena Manzoni

  1. By: Hitoshi Matsushima; Shunya Noda
    Abstract: We study the design of self-enforcing mechanisms that rely on neither a trusted third party (e.g., court, trusted mechanism designer) nor a long-term relationship. Instead, we use a smart contract written on blockchains as a commitment device. We design the digital court, a smart contract that identifies and punishes agents who reneged on the agreement. The digital court substitutes the role of legal enforcement in the traditional mechanism design paradigm. We show that, any agreement that is implementable with legal enforcement can also be implemented with enforcement by the digital court. To pursue a desirable design of the digital court, we study a way to leverage truthful reports made by a small fraction of behavioral agents. Our digital court has a unique equilibrium as long as there is a positive fraction of behavioral agents, and it gives correct judgment in the equilibrium if honest agents are more likely to exist than dishonest agents. The platform for smart contracts is already ready in 2020; thus, self-enforcing mechanisms proposed in this paper can be used practically, even now. As our digital court can be used for implementing general agreements, it does not leak the detailed information about the agreement even if it is deployed on a public blockchain (e.g., Ethereum) as a smart contract.
    Date: 2020–03
  2. By: Miho Hong (Yale Univ); Semin Kim (Yonsei Univ)
    Abstract: We investigate the locally ordinal notion of Bayesian incentive compatibility (LOBIC) of deterministic voting mechanisms. We consider a standard Bayesian environment where agents have private and strict preference orderings on a finite set of alternatives. Our main domains of preferences over alternatives are even larger than a broad class of domains — a few of its constituents being the unrestricted domain, the single-peaked domain, and the single-dipped domain. With independent and generic priors, we show that LOBIC of a mechanism combined with unanimity implies the tops-only property. Furthermore, we find a subclass of the domains where a mechanism with LOBIC and unanimity is dictatorial. We study the sufficiency of local incentive constraints for full incentive constraints and the relationship between LOBIC and dominant strategy incentive compatibility.
    Keywords: Incentive compatibility; Local incentive compatibility; Tops-only property; Dictatorship; Connected domains; Unanimity
    JEL: C72 D01 D02 D72 D82
    Date: 2020–03
  3. By: Giuseppe Attanasi (Université Côte d'Azur, CNRS, GREDEG, France); Kene Boun My (BETA, Université de Strasbourg); Andrea Guido (Institute for Futures Studies; Laboratory for Agent-Based Social Simulations (LABSS)); Mathieu Lefebvre (BETA, Université de Strasbourg)
    Abstract: There is robust evidence in the experimental economics literature showing that monopoly power is affected by trading institutions. In this paper we study whether trading institutions themselves can shape agents' market behaviour through the formation of anchors and reference points. We recreate experimentally five different double-auction market structures (perfect competition, perfect competition with quotas, cartel on price, cartel on price with quotas, and monopoly) in a within-subject design, varying the order of markets implementation. We investigate whether monopoly power endures the formation of reference prices emerged in previously implemented market structures. Results from our classroom experiments suggest that double-auction trading institutions succeed in preventing monopolists to exploit their market power. Furthermore, the formation of reference points in previously implemented markets negatively impacts on monopolists' power in later market structures.
    Keywords: Double Auctions, Perfect Competition, Monopoly, Market Imperfection, Spillovers, Classroom Experiments
    JEL: C90 D41 D42 D43 D44
    Date: 2020–03
  4. By: Giuseppe Attanasi (Université Côte d'Azur; CNRS, GREDEG, France); Samuele Centorrino (Stony Brook University); Elena Manzoni (University of Verona)
    Abstract: We study two well-known electronic markets: an over-the-counter (OTC) market, in which each agent looks for the best counterpart through bilateral negotiations, and a double auction (DA) market, in which traders post their quotes publicly. We focus on the DA-OTC efficiency gap and show how it varies with different market sizes (10, 20, 40, and 80 traders). We compare experimental results from a sample of 6,400 undergraduate students in Economics with zero-intelligent (ZI) agent-based simulations. Simulations with ZI traders show that the traded quantity (with respect to the efficient one) increases with market size under both DA and OTC. Experimental results with human traders confirm the same tendency under DA, while the share of periods in which the traded quantity is higher (lower) than the efficient one decreases (increases) with market size under OTC, ultimately leading to a DA-OTC efficiency gap increasing with market size. We rationalize these results by putting forward a novel game-theoretical model of OTC market as a repeated bargaining procedure under incomplete information on buyers' valuations and sellers' costs, showing how efficiency decreases slightly with size due to two counteracting effects: acceptance rates in earlier periods decrease with size, and earlier offers increase, but not always enough to compensate the decrease in acceptance rates.
    Keywords: Market Design, Classroom Experiment, Agent-based Modelling, Game-theoretic Modelling
    JEL: C70 C91 C92 D41 D47
    Date: 2020–03

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