nep-des New Economics Papers
on Economic Design
Issue of 2021‒05‒03
eleven papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Signalling in auctions: Experimental evidence By Bos, Olivier; Gomez-Martinez, Francisco; Onderstal, Sander; Truyts, Tom
  2. All-Pay Auctions with Reserve Price and Bid Cap By Oleg Muratov
  3. Strategic Leaks in First-Price Auctions and Tacit Collusion: The Case of Spying and Counter-Spying By Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
  4. Are Strategies Anchored? By Ivanova-Stenzel, Radosveta; Seres, Gyula
  5. Second-Chance Offers and Buyer Reputation: Theory and Evidence on Auctions with Default By Engelmann, Dirk; Frank, Jeff; Koch, Alexander K.; Valente, Marieta
  6. School Choice and Loss Aversion By Meisner, Vincent; von Wangenheim, Jonas
  7. Obviously Strategy-proof Mechanism Design With Rich Private Information By Mariya Halushka
  8. Robust Contracting in General Contract Spaces By Backhoff-Veraguas, Julio; Beissner, Patrick; Horst, Ulrich
  9. Fair Procedures with Naive Agents: Who Wants the Boston Mechanism? By König, Tobias; Kübler, Dorothea; Mechtenberg, Lydia; Schmacker, Renke
  10. Picking Sequences and Monotonicity in Weighted Fair Division By Mithun Chakraborty; Ulrike Schmidt-Kraepelin; Warut Suksompong
  11. Public Good Overprovision by a Manipulative Provider By Celik, Gorkem; Shin, Dongsoo; Strausz, Roland

  1. By: Bos, Olivier; Gomez-Martinez, Francisco; Onderstal, Sander; Truyts, Tom
    Abstract: We study the relative performance of the first-price sealed-bid auction, the second-price sealed-bid auction, and the all-pay sealed-bid auction in a laboratory experiment where bidders can signal information through their bidding behaviour to an outside observer. We consider two different information settings: the auctioneer reveals either the identity of the winning bidder only, or she also reveals the bidders' payments to an outside observer. We find that the all-pay sealed-bid auction in which the bidders' payments are revealed outperforms the other mechanisms in terms of revenue, while this mechanism underperforms in terms of efficiency relative to the winner-pay auctions.
    Keywords: Auctions,Signalling,Experiments
    JEL: C92 D44 D82
    Date: 2021
  2. By: Oleg Muratov
    Abstract: I characterize equilibria in an all-pay auction with a reserve price and a bid cap. I consider the cases of two and three players. I show that equilibrium bidding is characterized by atoms at 0, the reserve price, and the bid cap, as well as continuous bidding above the bid cap. If the valuations are high enough, the range for continuous bidding shrinks completely. I show that for some parameter ranges there exist multiple equilibria. Under three players, I show that there exist equilibria with the following features: the player with the non-top valuation can have a positive rent; the players with completely different valuations can actively compete for the single prize; the player with positive payoff can have different payoff in different equilibria.
    Date: 2021–04
  3. By: Cuihong Fan; Byoung Heon Jun; Elmar G. Wolfstetter
    Abstract: We analyze strategic leaks due to spying out a rival’s bid in a first-price auction. Such leaks induce sequential bidding, complicated by the fact that the spy may be a counterspy who serves the interests of the spied at bidder and reports strategically distorted information. This ambiguity about the type of spy gives rise to a non-standard signaling problem where both sender and receiver of messages have private information and the sender has a chance to make an unobserved move. Whereas spying without counterspy exclusively benefits the spying bidder, the potential presence of a counterspy yields a collusive outcome, even if the likelihood that the spy is a counterspy is arbitrarily small. That collusive impact shows up in all equilibria and is strongest in the unique pooling equilibrium which is also the payoff dominant equilibrium.
    Keywords: auctions, tacit collusion, espionage, second-mover advantage, signaling, incomplete information
    JEL: L12 L13 L41 D43 D44 D82
    Date: 2021
  4. By: Ivanova-Stenzel, Radosveta (TU Berlin); Seres, Gyula (HU Berlin)
    Abstract: Anchoring is one of the most studied and robust behavioral biases, but there is little knowledge about its persistence in strategic settings. This article studies the role of anchoring bias in private-value auctions. We test experimentally two different anchor types. The announcement of a random group identification number but also of an upper bid limit in the first-price sealed-bid auction result in higher bids. We show that such behavior can be explained as a rational response to biased beliefs. In Dutch auctions, the effect of a starting price, is negative. We demonstrate that the long-established ranking that the Dutch auction generates lower revenue than the first-price sealed-bid auction crucially depends on the size of the anchor.
    Keywords: anchoring bias; games; incomplete information; auctions;
    JEL: D44 D91 C72 C91
    Date: 2019–12–11
  5. By: Engelmann, Dirk (HU Berlin); Frank, Jeff (Royal Holloway, University of London); Koch, Alexander K. (Aarhus University); Valente, Marieta (University of Minho)
    Abstract: Winners in online auctions frequently fail to complete purchases. Major auction platforms therefore allow “second-chance” offers, where the runner-up bidder pays his own bid price, and they let sellers leave negative feedback on buyers who default. We show theoretically that (i) all else equal, the availability of second-chance offers reduces bids; (ii) sellers have no incentive to exclude bidders, even if they are nearly certain to default; (iii) buyer reputation systems reward bidders with a reputation for defaulting, counter to the idea of deterring such behavior. Our auction experiments support these predictions and provide insights on their practical relevance.
    Keywords: auctions; default; reputation; second-chance offers;
    JEL: D44 C91 L14 D83
    Date: 2020–04–21
  6. By: Meisner, Vincent (TU Berlin); von Wangenheim, Jonas (FU Berlin)
    Abstract: Extensive evidence suggests that participants in the direct student-proposing deferred-acceptance mechanism (DSPDA) play dominated strategies. In particular, students with low priority tend to misrepresent their preferences for popular schools. To explain the observed data, we introduce expectationbased loss aversion into a school-choice setting and characterize choiceacclimating personal equilibria in DSPDA. Truthful equilibria can fail to exist, and DSPDA might implement unstable and more inefficient allocations in both small and large markets. Specifically, it discriminates against students who are more loss averse or less overconfident than their peers, and amplifies already existing (or perceived) discrimination. To level the playing field, we propose serial dictatorship mechanisms as a strategyproof and stable alternative that is robust to these biases.
    Keywords: market design; matching; school choice; reference-dependent preferences; loss aversion; deferred acceptance;
    JEL: C78 D78 D82 D81 D91
    Date: 2019–12–05
  7. By: Mariya Halushka (Department of Economics, University of Ottawa)
    Abstract: I consider settings with rich private information – an agent's type may include private information other than just his preferences. In such settings, I identify a necessary condition for obviously strategy-proof implementation of social choice rules. I consider applications to strict preferences, matching and object allocation.
    Keywords: Obvious strategy-proofness, Mechanism design.
    JEL: D82 D90
    Date: 2021
  8. By: Backhoff-Veraguas, Julio (University of Twente); Beissner, Patrick (Australian National University); Horst, Ulrich (HU Berlin)
    Abstract: We consider a general framework of optimal mechanism design under adverse selection and ambiguity about the type distribution of agents. We prove the existence of optimal mechanisms under minimal assumptions on the contract space and prove that centralized contracting implemented via mechanisms is equivalent to delegated contracting implemented via a contract menu under these assumptions. Our abstract existence results are applied to a series of applications that include models of optimal risk sharing and of optimal portfolio delegation.
    Keywords: robust contracts; nonmetrizable contract spaces; ambiguity; financial markets;
    JEL: C02 D82
    Date: 2020–05–14
  9. By: König, Tobias (Linnaeus University); Kübler, Dorothea (TU Berlin and WZB Berlin); Mechtenberg, Lydia (University Hamburg); Schmacker, Renke (DIW Berlin)
    Abstract: We study preferences over procedures in the presence of naive agents. We employ a school choice setting following Pathak and Sönmez (2008) who show that sophisticated agents are better off under the Boston mechanism than under a strategy-proof mechanism if some agents are sincere. We use lab experiments to study the preferences of subjects for the Boston mechanism or the assortative matching. We compare the preferences of stakeholders who know their own role with agents behind the veil of ignorance and spectators. As predicted, stakeholders vote for the Boston mechanism if it maximizes their payoffs and vote for the assortative matching otherwise. This is in line with the model of Pathak and Sönmez (2008). Subjects behind the veil of ignorance mainly choose the Boston mechanism when the priority at schools is determined randomly. In a second experiment with priorities based on performance in a real-effort task, spectators whose payoff does not depend on the choice of the mechanism are split in their vote for the Boston mechanism and the assortative matching. According to the spectators’ statements in the post-experimental questionnaire, the main reason for preferring the Boston mechanism is that playing the game well deserves a higher payoff. These findings provide a novel explanation for the widespread use of the Boston mechanism.
    Keywords: matching markets; school choice; voting; Boston mechanism; naive agents; stable assortative matching ;
    JEL: D47 C92 I24 D72
    Date: 2019–12–18
  10. By: Mithun Chakraborty; Ulrike Schmidt-Kraepelin; Warut Suksompong
    Abstract: We study the problem of fairly allocating indivisible items to agents with different entitlements, which captures, for example, the distribution of ministries among political parties in a coalition government. Our focus is on picking sequences derived from common apportionment methods, including five traditional divisor methods and the quota method. We paint a complete picture of these methods in relation to known envy-freeness and proportionality relaxations for indivisible items as well as monotonicity properties with respect to the resource, population, and weights. In addition, we provide characterizations of picking sequences satisfying each of the fairness notions, and show that the well-studied maximum Nash welfare solution fails resource- and population-monotonicity even in the unweighted setting. Our results serve as an argument in favor of using picking sequences in weighted fair division problems.
    Date: 2021–04
  11. By: Celik, Gorkem (ESSEC Business School); Shin, Dongsoo (Santa Clara University); Strausz, Roland (HU Berlin)
    Abstract: We study contracting between a public good provider and users with private valuations of the good. We show that, once the provider extracts the users' private information, she benefits from manipulating the collective information received from all users when communicating with them. We derive conditions under which such manipulation determines the direction of distortions in public good provision. If the provider is non-manipulative, the public good is always underprovided, whereas overprovision occurs with a manipulative provider. With overprovision, not only high-valuation users, but also low-valuation users may obtain positive rents - users may prefer facing a manipulative provider.
    Keywords: information manipulation; public goods;
    JEL: D82 D86 H41
    Date: 2020–07–23

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