nep-des New Economics Papers
on Economic Design
Issue of 2020‒11‒23
eleven papers chosen by
Alex Teytelboym
University of Oxford

  1. Second-Chance Offers and Buyer Reputation: Theory and Evidence on Auctions with Default By Engelmann, Dirk; Koch, Alexander K.; Frank, Jeff; Valente, Marieta
  2. Price of Anarchy of Simple Auctions with Interdependent Values By Alon Eden; Michal Feldman; Inbal Talgam-Cohen; Ori Zviran
  3. Designing Contests Between Heterogeneous Contestants: An Experimental Studie of Tie-Breaks and Bid-Caps in All-Pay Auctions By Llorente-Saguer, Aniol; Sheremeta, Roman; Szech, Nora
  4. Strategy-proof and Envy-free Mechanisms for House Allocation By Priyanka Shende; Manish Purohit
  5. Constrained Serial Rule on the Full Preference Domain By Priyanka Shende
  6. Preference Estimation in Deferred Acceptance with Partial School Rankings By Shanjukta Nath
  7. Evaluating Advice in a Matching Mechanism with Experienced Participants: An Experimental Study of University Applicant Behaviour in Australia By Guillen, Pablo; Kesten, Onur; Kiefer, Alexander; Melatos, Mark
  8. Choices and Outcomes in Assignment Mechanisms: The Allocation of Deceased Donor Kidneys By Nikhil Agarwal; Charles Hodgson; Paulo Somaini
  9. Constraints on Matching Markets Based on Moral Concerns By Huesmann, Katharina; Wambach, Achim
  10. Mechanism Design for Unequal Societies By Marco Reuter; Carl-Christian Groh
  11. Persuading an Informed Committee By Nina Bobkova; Saskia Klein

  1. By: Engelmann, Dirk; Koch, Alexander K.; Frank, Jeff; Valente, Marieta
    Abstract: Winning bidders in online auctions frequently fail to complete the transaction. Because enforcing bids usually is too costly, auction platforms often allow sellers to make a "secondchance" offer to the second highest bidder, to buy at the bid price of this bidder, and let sellers leave negative feedback on buyers who fail to pay. We show theoretically that, all else equal, the availability of second-chance offers reduces amounts bid in auctions where there is a probability that a bidder defaults. Nevertheless, we show that it is not optimal for a seller to exclude a buyer who is likely to default. In addition, buyer reputation systems create a strategic effect that rewards bidders who have a reputation for defaulting, counter to the idea of creating a deterrent against such behavior. Actual bidding in experimental auctions support these predictions and provide insights on their practical relevance.
    Keywords: Auctions,Default,Reputation,Second-Chance Offers
    JEL: D44
    Date: 2020
  2. By: Alon Eden; Michal Feldman; Inbal Talgam-Cohen; Ori Zviran
    Abstract: We expand the literature on the price of anarchy (PoA) of simultaneous item auctions by considering settings with correlated values; we do this via the fundamental economic model of interdependent values (IDV). It is well-known that in multi-item settings with private values, correlated values can lead to bad PoA, which can be polynomially large in the number of agents $n$. In the more general model of IDV, we show that the PoA can be polynomially large even in single-item settings. On the positive side, we identify a natural condition on information dispersion in the market, termed $\gamma$-heterogeneity, which enables good PoA guarantees. Under this condition, we show that for single-item settings, the PoA of standard mechanisms degrades gracefully with $\gamma$. For settings with $m>1$ items we show a separation between two domains: If $n \geq m$, we devise a new simultaneous item auction with good PoA (with respect to $\gamma$), under limited information asymmetry. To the best of our knowledge, this is the first positive PoA result for correlated values in multi-item settings. The main technical difficulty in establishing this result is that the standard tool for establishing PoA results -- the smoothness framework -- is unsuitable for IDV settings, and so we must introduce new techniques to address the unique challenges imposed by such settings. In the domain of $n \ll m$, we establish impossibility results even for surprisingly simple scenarios.
    Date: 2020–11
  3. By: Llorente-Saguer, Aniol; Sheremeta, Roman; Szech, Nora
    Abstract: Contests are well-established mechanisms for political lobbying, innovation, rentseeking, incentivizing workers, and advancing R&D. A well-known theoretical result in the contest literature is that greater heterogeneity decreases investments of contestants because of the "discouragement effect." Leveling the playing field by favoring weaker contestants through strict bid-caps and favorable tie-breaking rules can reduce discouragement and increase the designer's revenue. We test these predictions in a laboratory experiment. Our data confirm that placing bid-caps and using favorable tie-breaking rules significantly diminishes discouragement in weaker contestants. The impact on revenue is more intricate. In contrast to theory, a strict bid-cap does not increase revenue, but a mild bid-cap can increase revenue even when not predicted by theory. Our data also show that tie-breaking rules seem to have little impact on the designer's revenue: the encouragement of weaker contestants is offset by stronger contestants competing less aggressively. We discuss deviations from the Nash predictions in light of different behavioral approaches.
    Keywords: all-pay auction,rent-seeking,lobbying,bid-caps,tie-breaks,contest design
    JEL: C72 C91 D72
    Date: 2020
  4. By: Priyanka Shende; Manish Purohit
    Abstract: We consider the problem of allocating indivisible objects to agents when agents have strict preferences over objects. There are inherent trade-offs between competing notions of efficiency, fairness and incentives in assignment mechanisms. It is, therefore, natural to consider mechanisms that satisfy two of these three properties in their strongest notions, while trying to improve on the third dimension. In this paper, we are motivated by the following question: Is there a strategy-proof and envy-free random assignment mechanism more efficient than equal division? Our contributions in this paper are twofold. First, we further explore the incompatibility between efficiency and envy-freeness in the class of strategy-proof mechanisms. We define a new notion of efficiency that is weaker than ex-post efficiency and prove that any strategy-proof and envy-free mechanism must sacrifice efficiency even in this very weak sense. Next, we introduce a new family of mechanisms called Pairwise Exchange mechanisms and make the surprising observation that strategy-proofness is equivalent to envy-freeness within this class. We characterize the set of all neutral and strategy-proof (and hence, also envy-free) mechanisms in this family and show that they admit a very simple linear representation.
    Date: 2020–10
  5. By: Priyanka Shende
    Abstract: We study the problem of assigning objects to agents in the presence of arbitrary linear constraints when agents are allowed to be indifferent between objects. Our main contribution is the generalization of the (Extended) Probabilistic Serial mechanism via a new mechanism called the Constrained Serial Rule. This mechanism is computationally efficient and maintains desirable efficiency and fairness properties namely constrained ordinal efficiency and envy-freeness among agents of the same type. Our mechanism is based on a linear programming approach that accounts for all constraints and provides a re-interpretation of the bottleneck set of agents that form a crucial part of the Extended Probabilistic Serial mechanism.
    Date: 2020–11
  6. By: Shanjukta Nath
    Abstract: The Deferred Acceptance algorithm is a popular school allocation mechanism thanks to its strategy proofness. However, with application costs, strategy proofness fails, leading to an identification problem. In this paper, I address this identification problem by developing a new Threshold Rank setting that models the entire rank order list as a one-step utility maximization problem. I apply this framework to study student assignments in Chile. There are three critical contributions of the paper. I develop a recursive algorithm to compute the likelihood of my one-step decision model. Partial identification is addressed by incorporating the outside value and the expected probability of admission into a linear cost framework. The empirical application reveals that although school proximity is a vital variable in school choice, student ability is critical for ranking high academic score schools. The results suggest that policy interventions such as tutoring aimed at improving student ability can help increase the representation of low-income low-ability students in better quality schools in Chile.
    Date: 2020–10
  7. By: Guillen, Pablo; Kesten, Onur; Kiefer, Alexander; Melatos, Mark
    Abstract: The majority of undergraduate university applications in the state of New South Wales – Australia’s largest state – are processed by a clearinghouse, the Universities Admissions Centre (UAC). Applicants submit an ordered list of course preferences to UAC which applies a matching algorithm to allocate university places to eligible applicants. The algorithm incorporates the possibility of a type of “early action” through which applicants receive guaranteed enrolments. Applicants receive advice on how to construct their course preference list from multiple sources (including individual universities). This advice is often confusing, inconsistent with official UAC advice or simply misleading. To investigate the implications, we run an experiment in a choice environment that mimics the UAC application process and in which truth telling is a dominant strategy. We vary the advice received across treatments: no advice, UAC advice only, (inaccurate) university advice only, and both UAC and university advice together. Overall, 75.5% of participants fail to use the dominant strategy. High rates of applicant manipulation persist even when applicants are provided with accurate UAC advice. We find that students who attend non-selective government schools are more prone to use strictly dominated strategies than those who attend academically selective government schools and private schools.
    Date: 2020–11
  8. By: Nikhil Agarwal; Charles Hodgson; Paulo Somaini
    Abstract: While the mechanism design paradigm emphasizes notions of efficiency based on agent preferences, policymakers often focus on alternative objectives. School districts emphasize educational achievement, and transplantation communities focus on patient survival. It is unclear whether choice-based mechanisms perform well when assessed based on these outcomes. This paper evaluates the assignment mechanism for allocating deceased donor kidneys on the basis of patient life-years from transplantion (LYFT). We examine the role of choice in increasing LYFT and compare equilibrium assignments to benchmarks that remove choice. Our model combines choices and outcomes in order to study how selection induced in the mechanism affects LYFT. We show how to identify and estimate the model using quasi-experimental variation resulting from the mechanism. The estimates suggest that the design in use selects patients with better post-transplant survival prospects and matches them well, resulting in an average LYFT of 8.78, which is 0.92 years more than a random assignment. However, the aggregate LYFT can be increased to 13.84. Realizing the majority of the gains requires transplanting relatively healthy patients, who would have longer life expectancies even without a transplant. Therefore, a policymaker faces a dilemma between transplanting patients who are sicker and those for whom life will be extended the longest.
    JEL: C36 D47 I14
    Date: 2020–11
  9. By: Huesmann, Katharina; Wambach, Achim
    Abstract: Many markets ban monetary transfers. Rather than exogenously imposing this constraint, we introduce discrimination-freeness as a desideratum based on egalitarian objectives. Discrimination-freeness requires that an agent's object assignment is independent of his wealth. We show that money cannot be used to Pareto-improve ordinal and money-free assignments without violating discrimination-freeness. Furthermore, if a discrimination-free assignment of objects and money is implementable then the respective object assignment is also implementable without money. Once money can be used outside a market designer's control, further restrictions than only money-freeness might be required to address discrimination concerns.
    Keywords: repugnance,inequality,market design,matching markets
    JEL: D47 D63 H42 I00
    Date: 2020
  10. By: Marco Reuter; Carl-Christian Groh
    Abstract: We study optimal mechanisms for a utilitarian designer who seeks to assign multiple units of an indivisible good to a group of agents with unit demand. The agents have heterogeneous marginal utilities of money, which implies that utility is not perfectly transferable between them. Heterogeneous marginal utilities of money may naturally arise in environments where agents have different wealth endowments. We show that the ex post efficient allocation rule is not optimal in our setting. Firstly, a high willingness to pay may stem from a low marginal utility of money. Moreover, the transfer rule does not only facilitate implementation of the desired social choice function in our setting, but also directly affects social welfare. In the optimal mechanism, rationing may occur, which entails a conflict between ex ante and ex post efficiency. In an extension, we show that it is still not utilitarian optimal to allocate the good solely based on willingness to pay even when redistribution is not possible. Finally, we highlight how our mechanism can be implemented as an auction with minimum bids and bidding subsidies.
    Keywords: optimal mechanism design, redistribution, inequality, auctions
    JEL: D44 D47 D61 D63 D82
    Date: 2020–11
  11. By: Nina Bobkova; Saskia Klein
    Abstract: A biased sender seeks to persuade a committee to vote for a proposal by providing public information about its quality. Each voter has some private information about the proposal's quality. We characterize the sender-optimal disclosure policy under unanimity rule when the sender can versus cannot ask voters for a report about their private information. The sender can only profit from asking agents about their private signals when the private information is sufficiently accurate. For all smaller accuracy levels, a sender who cannot elicit the private information is equally well off.
    Keywords: Voting, Bayesian Persuasion, Strategic Voting, Unanimity
    Date: 2020–11

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