nep-des New Economics Papers
on Economic Design
Issue of 2020‒06‒22
eight papers chosen by
Alex Teytelboym
University of Oxford

  1. Redistribution through Markets By Mohammad Akbarpour; Piotr; Scott Duke Kominers
  2. Connecting Heterogeneous Agents under Incomplete Information By Masaki Aoyagi
  3. School choice, admission, and equity of access By Ian Walker; Matthew Weldon
  4. Market Fragmentation By Chen, Daniel; Duffie, Darrell
  5. Payoff Implications of Incentive Contracting By Garrett, Daniel F
  6. Uniform Pricing versus Third-Degree Price Discrimination By Bergemann, Dirk; Castro, Francisco; Weintraub, Gabriel
  7. Characterization of TU games with stable cores by nested balancedness By Grabisch, Michel; Sudhölter, Peter
  8. Choosing an Electoral Rule By Bol, Damien; Blais, André; Coulombe, Maxime; Laslier, Jean-François; Pilet, Jean-Benoit

  1. By: Mohammad Akbarpour (Stanford University); Piotr (Group for Research in Applied Economics (GRAPE); Northwestern University); Scott Duke Kominers (Harvard University; University of Chicago)
    Abstract: When macroeconomic tools fail to respond to wealth inequality optimally, regulators can still seek to mitigate inequality within individual markets. A social planner with distributional preferences might distort allocative efficiency to achieve a more desirable split of surplus, for example, by setting higher prices when sellers are poor--effectively, using the market as a redistributive tool. In this paper, we seek to understand how to design goods markets optimally in the presence of inequality. Using a mechanism design approach, we uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution in a setting where the second welfare theorem fails because of private information and participation constraints. We find that competitive equilibrium allocation is not always optimal. Instead, when there is substantial inequality across sides of the market, the optimal design uses a tax-like mechanism, introducing a wedge between the buyer and seller prices, and redistributing the resulting surplus to the poorer side of the market via lump-sum payments. When there is significant within-side inequality, meanwhile, it may be optimal to impose price controls even though doing so induces rationing.
    Keywords: optimal mechanism design, redistribution, inequality, welfare theorems
    JEL: D47 D61 D63 D82 H21
    Date: 2020
  2. By: Masaki Aoyagi
    Abstract: This paper studies the problem of a monopolistic platform which offers agents connection with one another. Agents have heterogeneous characteristics that are valued by some other agents and observed privately by the principal. The agents are privately informed about their heterogeneous preferences over the characteristics of the other agents. The platform solicits information from the agents about their preferences and then offers an allocation that consists of groups of connected agents and subscription fees. We study mechanisms which induce truthful reporting and acceptance of the proposed allocation as a unique equilibrium outcome. We identify asymptotically optimal mechanisms which fully extract the agents' informational rents in the limit as the market becomes large.
    Date: 2020–06
  3. By: Ian Walker; Matthew Weldon
    Keywords: School choice, Mechanism design
    JEL: I20 I21
    Date: 2020
  4. By: Chen, Daniel (Stanford U); Duffie, Darrell (Stanford U)
    Abstract: We model a simple market setting in which fragmentation of trade of the same asset across multiple exchanges improves allocative efficiency. Fragmentation reduces the inhibiting effect of price-impact avoidance on order submission. Although fragmentation reduces market depth on each exchange, it also isolates cross-exchange price impacts, leading to more aggressive overall order submission and better rebalancing of unwanted positions across traders. Fragmentation also has implications for the extent to which prices reveal traders' private information. While a given exchange price is less informative in more fragmented markets, all exchange prices taken together are more informative.
    JEL: D47 D82 G14
    Date: 2020–02
  5. By: Garrett, Daniel F
    Abstract: In the context of a canonical agency model, we study the payoff implications of introducing optimally structured incentives. We do so from the perspective of an analyst who does not know the agent's preferences for responding to incentives, but does know that the principal knows them. We provide, in particular, tight bounds on the principal's expected benefit from optimal incentive contracting across feasible values of the agent's expected rents. We thus show how economically relevant predictions can be made robustly given ignorance of a key primitive.
    Keywords: mechanism design; Procurement; robustness
    JEL: D82
    Date: 2020–05
  6. By: Bergemann, Dirk (?); Castro, Francisco (?); Weintraub, Gabriel (Stanford U)
    Abstract: We compare the revenue of the optimal third-degree price discrimination policy against a uniform pricing policy. A uniform pricing policy offers the same price to all segments of the market. Our main result establishes that for a broad class of third-degree price discrimination problems with concave revenue functions and common support, a uniform price is guaranteed to achieve one-half of the optimal monopoly proï¬ ts. This revenue bound holds for any arbitrary number of segments and prices that the seller would use in case he would engage in third-degree price discrimination. We further establish that these conditions are tight and that a weakening of common support or concavity leads to arbitrarily poor revenue comparisons.
    Date: 2020–02
  7. By: Grabisch, Michel (Paris School of Economics); Sudhölter, Peter (Department of Business and Economics)
    Abstract: A balanced transferable utility game (N, v) has a stable core if its core is externally stable, that is, if each imputation that is not in the core is dominated by some core element. Given two payoff allocations x and y, we say that x outvotes y via some coalition S of a feasible set if x dominates y via S and x allocates at least v(T ) to any feasible T that is not contained in S. It turns out that outvoting is transitive and the set M of maximal elements with respect to outvoting coincides with the core if and only if the game has a stable core. By applying the duality theorem of linear programming twice, it is shown that M coincides with the core if and only if a certain nested balancedness condition holds. Thus, it can be checked in finitely many steps whether a balanced game has a stable core. We say that the game has a super-stable core if each payoff vector that allocates less than v(S) to some coalition S is dominated by some core element and prove that core super-stability is equivalent to vital extendability, requiring that each vital coalition is extendable.
    Keywords: Domination; stable set; core; TU game
    JEL: C71
    Date: 2020–06–15
  8. By: Bol, Damien (Université de Montréal); Blais, André; Coulombe, Maxime; Laslier, Jean-François; Pilet, Jean-Benoit
    Abstract: Citizens are increasingly involved in the design of democratic institutions, for instance via referendums. If they support the institution that best serves their self-interest, the outcome inevitably advantages the largest group and disadvantages minorities. In this paper, we challenge this pessimistic view with an original lab experiment in France and Great Britain. In the first phase, experimental subjects experience elections under plurality and approval voting. In the second phase, they decide which rule they want to use for extra elections. The treatment is whether they do or do not have information to determine where their self-interest lies before deciding. We find that self-interest shapes people’s decisions, but so do intrinsic egalitarian values that subjects have outside of the lab. The implications are: (1) people have consistent ‘value-driven preferences’ for electoral rules, and (2) putting them in a situation of uncertainty leads to an outcome that reflects these values.
    Date: 2020–06–05

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