nep-des New Economics Papers
on Economic Design
Issue of 2020‒09‒21
eleven papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Identification and Inference in First-Price Auctions with Risk Averse Bidders and Selective Entry By Xiaohong Chen; Matthew Gentry; Tong Li; Jingfeng Lu
  2. Optimal Bidding Strategy for Maker Auctions By Michael Darlin; Nikolaos Papadis; Leandros Tassiulas
  3. Many-to-one Matching: Externalities and Stability By Alfredo Salgado
  4. Cost of transformation: a measure on matchings By Burak Can; Mohsen Pourpouneh; Ton Storcken
  5. Dynamic Allocation without Money By Guo, Yingni; Hörner, Johannes
  6. Characterizing Pareto Optima: Sequential Utilitarian Welfare Maximization By Yeon-Koo Che; Jinwoo Kim; Fuhito Kojima; Christopher Thomas Ryan
  7. Optimal monitoring design By Georgiadis, George; Szentes, Balázs
  8. Optimal Rating Design By Maryam Saeedi; Ali Shourideh
  9. Motivational Ratings By Hörner, Johannes; Lambert, Nicolas
  10. Constrained Trading Networks By Can Kizilkale; Rakesh Vohra
  11. An Analysis of Random Elections with Large Numbers of Voters By Matthew Harrison-Trainor

  1. By: Xiaohong Chen (Cowles Foundation, Yale University); Matthew Gentry; Tong Li; Jingfeng Lu
    Abstract: We study identification and inference in first-price auctions with risk averse bidders and selective entry, building on a flexible entry and bidding framework we call the Affiliated Signal with Risk Aversion (AS-RA) model. Assuming that the econometrician observes either exogenous variation in the number of potential bidders (N) or a continuous instrument (z) shifting opportunity costs of entry, we provide a sharp characterization of the nonparametric restrictions implied by equilibrium bidding. Given variation in either competition or costs, this characterization implies that risk neutrality is nonparametrically testable in the sense that if bidders are strictly risk averse, then no risk neutral model can rationalize the data. In addition, if both instruments (discrete N and continuous z) are available, then the model primitives are nonparametrically point identified. We then explore inference based on these identification results, focusing on set inference and testing when primitives are set identified. Keywords: Auctions, entry, risk aversion, identification, set inference.
    Keywords: Auctions, Entry, Risk aversion, Identification, Set inference
    JEL: D44 C57
    Date: 2020–09
  2. By: Michael Darlin; Nikolaos Papadis; Leandros Tassiulas
    Abstract: The Maker Protocol is a decentralized finance application that enables collateralized lending. The application uses open-bid, second-price auctions to complete its loan liquidation process. In this paper, we develop a bidding function for these auctions, focusing on the costs incurred to participate in the auctions. We then optimize these costs using parameters from historical auction data, and compare our optimal bidding prices to the historical auction prices. We find that the majority of auctions end at higher prices than our recommended optimal prices, and we propose several theories for these results.
    Date: 2020–09
  3. By: Alfredo Salgado
    Abstract: In this paper, we establish sufficient conditions on the domain of preferences and agents' behavior in order to characterize the existence of stable assignments in many-to-one matching problems with externalities. The set of stable matchings depends on what agents believe other agents will do if they deviate. Such sets of reactions are called estimation functions or simply estimations. We show that, unless some restrictions would be imposed on agents' preferences, there is no constraint on agents' behavior that assures the existence of stable matchings. In addition, we introduce a condition on preferences called bottom q-substitutability that guarantees the existence of at least one stable matching when the set of estimations includes all possible matches. Finally, we analyze a notion of the core and its relation with the set of stable assignments.
    Keywords: Two-sided matching: Externalities; Stability; Estimation functions; Pessimistic agents; Core.
    JEL: C71 C78 D62
    Date: 2020–03
  4. By: Burak Can (Department of Data Analytics and Digitalisation, Maastricht University); Mohsen Pourpouneh (Department of Food and Resource Economics, University of Copenhagen); Ton Storcken (Department of Quantitative Economics, Maastricht University)
    Abstract: This paper constructs a normative framework to quantify the difference (distance) between outcomes of market mechanisms in matching markets. We investigate the "cost of transformation" from one market mechanism to another, based on the differences in the outputs of these mechanisms, i.e., the matchings. Several conditions are introduced to ensure that this cost reflects the welfare effect of the transformation on individuals. We find a class of measures called scaled Borda measures, which is characterized by these conditions. Several possible applications of these measures in different markets are also discussed, such as measuring how unstable, how unfair, or how inefficient a mechanism (or a matching) is.
    Keywords: matching markets, distance function, metrics, cost of stability
    JEL: C78 D61 D63
    Date: 2020–08
  5. By: Guo, Yingni; Hörner, Johannes
    Abstract: We analyze the optimal design of dynamic mechanisms in the absence of transfers. The agent’s value evolves according to a two-state Markov chain. The designer uses future allocation decisions to elicit private information. We solve for the optimal allocation mechanism. Unlike with transfers, efficiency decreases over time. In the long run, polarization occurs. A simple implementation is provided. The agent is endowed with a “quantified entitlement,” corresponding to the number of units he is entitled to claim in a row.
    Keywords: mechanism design; principal-agent; quota mechanism; token budget
    JEL: D82 C73
    Date: 2020–08–26
  6. By: Yeon-Koo Che; Jinwoo Kim; Fuhito Kojima; Christopher Thomas Ryan
    Abstract: We characterize Pareto optimality via sequential utilitarian welfare maximization: a utility vector u is Pareto optimal if and only if there exists a finite sequence of nonnegative (and eventually positive) welfare weights such that $u$ maximizes utilitarian welfare with each successive welfare weights among the previous set of maximizers. The characterization can be further related to maximization of a piecewise-linear concave social welfare function and sequential bargaining among agents a la generalized Nash bargaining. We provide conditions enabling simpler utilitarian characterizations and a version of the second welfare
    Date: 2020–08
  7. By: Georgiadis, George; Szentes, Balázs
    Abstract: This paper considers a Principal–Agent model with hidden action in which the Principal can monitor the Agent by acquiring independent signals conditional on effort at a constant marginal cost. The Principal aims to implement a target effort level at minimal cost. The main result of the paper is that the optimal information-acquisition strategy is a two-threshold policy and, consequently, the equilibrium contract specifies two possible wages for the Agent. This result provides a rationale for the frequently observed single-bonus wage contracts.
    JEL: J1
    Date: 2020–03–29
  8. By: Maryam Saeedi; Ali Shourideh
    Abstract: We study the design of optimal rating systems in the presence of adverse selection and moral hazard. Buyers and sellers interact in a competitive market where goods are vertically differentiated according to their qualities. Sellers differ in their cost of quality provision, which is private information to them. An intermediary observes sellers' quality and chooses a rating system, i.e., a signal of quality for buyers, in order to incentivize sellers to produce high-quality goods. We provide a full characterization of the set of payoffs and qualities that can arise in equilibrium under an arbitrary rating system. We use this characterization to analyze Pareto optimal rating systems when seller's quality choice is deterministic and random.
    Date: 2020–08
  9. By: Hörner, Johannes; Lambert, Nicolas
    Abstract: Performance evaluation (\rating") systems not only provide information to users but also motivate the rated worker. This paper solves for the optimal (effort-maximizing) rating within the standard career concerns framework. We prove that this rating is a linear function of past observations. The rating, however, is not a Markov process, but rather the sum of two Markov processes. We show how it combines information of different types and vintages. An increase in effort may adversely affect some (but not all) future ratings.
    Keywords: Career Concerns; Mechanism Design; Ratings.
    Date: 2020–08–26
  10. By: Can Kizilkale; Rakesh Vohra
    Abstract: Trades based on bilateral (indivisible) contracts can be represented by a network. Vertices correspond to agents while arcs represent the non-price elements of a bilateral contract. Given prices for each arc, agents choose the incident arcs that maximize their utility. We enlarge the model to allow for polymatroidal constraints on the set of contracts that may be traded which can be interpreted as modeling limited one for-one substitution. We show that for two-sided markets there exists a competitive equilibrium however for multi-sided markets this may not be possible.
    Date: 2020–08
  11. By: Matthew Harrison-Trainor
    Abstract: In an election in which each voter ranks all of the candidates, we consider the head-to-head results between each pair of candidates and form a labeled directed graph, called the margin graph, which contains the margin of victory of each candidate over each of the other candidates. A central issue in developing voting methods is that there can be cycles in this graph, where candidate $\mathsf{A}$ defeats candidate $\mathsf{B}$, $\mathsf{B}$ defeats $\mathsf{C}$, and $\mathsf{C}$ defeats $\mathsf{A}$. In this paper we apply the central limit theorem, graph homology, and linear algebra to analyze how likely such situations are to occur for large numbers of voters. There is a large literature on analyzing the probability of having a majority winner; our analysis is more fine-grained. The result of our analysis is that in elections with the number of voters going to infinity, margin graphs that are more cyclic in a certain precise sense are less likely to occur.
    Date: 2020–09

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