nep-des New Economics Papers
on Economic Design
Issue of 2021‒08‒09
eleven papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  1. Dutch vs. First-Price Auctions With Expectations-Based Loss-Averse Bidders By Benjamin Balzer; Antonio Rosato; Jonas von Wangenheim
  2. English Versus Vickrey Auctions With Loss-Averse Bidders By Jonas von Wangenheim
  3. Renegotiation and discrimination in symmetric procurement auctions By Leandro Arozamena; Juan José Ganuza; Federico Weinschelbaum
  4. School Choice and Loss Aversion By Vincent Meisner; Jonas von Wangenheim
  5. Slot-specific priorities with capacity transfers By Avataneo, Michelle; Turhan, Bertan
  6. The Optimality of Upgrade Pricing By Dirk Bergemann; Alessandro Bonatti; Andreas Haupt; Alex Smolin
  7. Epistemological Implementation of Social Choice Functions By Hitoshi Matsushima
  8. Selling Impressions: Efficiency vs. Competition By Dirk Bergemann; Tibor Heumann; Stephen Morris
  9. Competitive equilibrium always exists for combinatorial auctions with graphical pricing schemes By Marie-Charlotte Brandenburg; Christian Haase; Ngoc Mai Tran
  10. Grouping agents with persistent types By James Malcomson
  11. The AI Economist: Optimal Economic Policy Design via Two-level Deep Reinforcement Learning By Stephan Zheng; Alexander Trott; Sunil Srinivasa; David C. Parkes; Richard Socher

  1. By: Benjamin Balzer; Antonio Rosato; Jonas von Wangenheim
    Abstract: We study Dutch and fi rst-price auctions with expectations-based loss-averse bidders and show that the strategic equivalence between these formats no longer holds. Intuitively, as the Dutch auction unfolds, a bidder becomes more optimistic about her chances of winning; this stronger "attachment" effect pushes her to bid more aggressively than in the first-price auction. Thus, Dutch auctions raise more revenue than first-price ones. Indeed, the Dutch auction raises the most revenue among standard auction formats. Our results imply that dynamic mechanisms that make bidders more optimistic raise more revenue, thereby ratio- nalizing the use of descending-price mechanisms by sellers in this field.
    Keywords: Loss Aversion, Dutch Auctions, Revenue Equivalence, Personal Equilibrium
    JEL: D44 D81 D82
    Date: 2021–07
  2. By: Jonas von Wangenheim
    Abstract: Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectations-based loss aversion à la Köszegi and Rabin in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that - even with independent private values - the Vickrey auction yields strictly higher revenue than the (ascending clock) English auction, violating the well-known revenue equivalence.
    Keywords: Vickrey auction, English auction, Japanese auction, expectationsbased loss aversion, revenue equivalence, dynamic loss aversion, personal equilibrium
    JEL: D03 D44
    Date: 2021–07
  3. By: Leandro Arozamena; Juan José Ganuza; Federico Weinschelbaum
    Abstract: In order to make competition open, fair and transparent, procurement regulations often require equal treatment for all bidders. This paper shows how a favorite supplier can be treated preferentially (opening the door to home bias and corruption) even when explicit discrimination is not allowed. We analyze a procurement setting in which the optimal design of the project to be contracted is unknown. The sponsor has to invest in specifying the project. The larger the investment, the higher the probability that the initial design is optimal. When it is not, a bargaining process between the winning firm and the sponsor takes place. Profits from bargaining are larger for the favorite supplier than for its rivals. Given this comparative advantage, the favored firm bids more aggressively and then, it wins more often than standard firms. Finally, we show that the sponsor invests less in specifying the initial design, when favoritism is stronger. Underinvestment in design specification is a tool for providing a comparative advantage to the favored firm.
    Keywords: auctions, favoritism, auction design, renegotiation, corruption
    JEL: I12 J13 H31 H24
    Date: 2021–07
  4. By: Vincent Meisner; Jonas von Wangenheim
    Abstract: Evidence suggests that participants in direct student-proposing deferred-acceptance mechanisms (DSPDA) play dominated strategies. To explain the observed data, we introduce expectation-based loss aversion into a school-choice setting and characterize choice-acclimating personal equilibria in DSPDA. We find that non-truthful preference submissions can be strictly optimal if and only if they are top-choice monotone. In equilibrium, DSPDA may implement allocations with justified envy. Specifically, it discriminates against students who are more loss averse or less con- fident than their peers, and amplifies already existing discrimination. To level the playing field, we propose sequential mechanisms as an alternative that is robust to these biases.
    Keywords: Market design, Matching, School choice, Reference-dependent preferences, Loss aversion, Deferred acceptance
    JEL: C78 D47 D78 D81 D82 D91
    Date: 2021–07
  5. By: Avataneo, Michelle; Turhan, Bertan
    Abstract: In many real-world matching applications, there are restrictions for institutions either on priorities of their slots or on the transferability of unfilled slots over others (or both). Motivated by the need in such real-life matching problems, this paper formulates a family of practical choice rules, slot-specific priorities with capacity transfers (SSPwCT). These rules invoke both slot-specific priorities structure and transferability of vacant slots. We show that the cumulative offer mechanism (COM) is stable, strategy-proof and respects improvements with regards to SSPwCT choice rules. Transferring the capacity of one more unfilled slot, while all else is constant, leads to strategy-proof Pareto improvement of the COM. Following Kominers' (2020) formulation, we also provide comparative static results for expansion of branch capacity and addition of new contracts in the SSPwCT framework. Our results have implications for resource allocation problems with diversity considerations.
    Date: 2021–09–01
  6. By: Dirk Bergemann (Cowles Foundation, Yale University); Alessandro Bonatti (MIT); Andreas Haupt (Institute for Data, Systems, and Society, MIT); Alex Smolin (Dept. of Economics, Yale University)
    Abstract: We consider a multiproduct monopoly pricing model. We provide sufficient conditions under which the optimal mechanism can be implemented via upgrade pricing—a menu of product bundles that are nested in the strong set order. Our approach exploits duality methods to identify conditions on the distribution of consumer types under which (a) each product is purchased by the same set of buyers as under separate monopoly pricing (though the transfers can be different), and (b) these sets are nested. We exhibit two distinct sets of sufficient conditions. The first set of conditions is given by a weak version of monotonicity of types and virtual values, while maintaining a regularity assumption, i.e., that the product-by-product revenue curves are singlepeaked. The second set of conditions establishes the optimality of upgrade pricing for type spaces with monotone marginal rates of substitution (MRS)—the relative preference ratios for any two products are monotone across types. The monotone MRS condition allows us to relax the earlier regularity assumption. Under both sets of conditions, we fully characterize the product bundles and prices that form the optimal upgrade pricing menu. Finally, we show that, if the consumer’s types are monotone, the seller can equivalently post a vector of single-item prices: upgrade pricing and separate pricing are equivalent.
    Keywords: Revenue Maximization, Mechanism design, Strong duality, Upgrade pricing
    JEL: D42 D82
    Date: 2021–07
  7. By: Hitoshi Matsushima (University of Tokyo)
    Abstract: We investigate the implementation of social choice functions (SCFs) from an epistemological perspective. We consider the possibility that in higher-order beliefs there exists an honest agent who is motivated by intrinsic preference for honesty as well as material interest. We assume weak honesty, in that an honest agent is mostly motivated by material interests and even tells white lies. Importantly, this study assumes that “all agents are selfish†never happens to be common knowledge. We then show the following positive results for the implementability: In complete information environments, with three or more agents, any SCF is uniquely implementable in the Bayesian Nash equilibrium (BNE). In asymmetric information environments, with a minor restriction named information diversity, any incentive-compatible SCF is fully implementable in BNE. An SCF, whether material or nonmaterial (ethical), can be implemented even if all agents are selfish and “all agents are selfish†is mutual knowledge.
    Date: 2021–07
  8. By: Dirk Bergemann (Cowles Foundation, Yale University); Tibor Heumann (Pontificia Universidad Católica de Chile); Stephen Morris (Dept. of Economics, MIT)
    Abstract: In digital advertising, a publisher selling impressions faces a trade-off in deciding how precisely to match advertisers with viewers. A more precise match generates efficiency gains that the publisher can hope to exploit. A coarser match will generate a thicker market and thus more competition. The publisher can control the precision of the match by controlling the amount of information that advertisers have about viewers. We characterize the optimal trade-off when impressions are sold by auction. The publisher pools premium matches for advertisers (when there will be less competition on average) but gives advertisers full information about lower quality matches.
    Keywords: Second Price Auction, Conflation, Digital Advertising, Impressions, Bayesian Persuasion, Information Design
    JEL: D44 D47 D83 D84
    Date: 2021–07
  9. By: Marie-Charlotte Brandenburg; Christian Haase; Ngoc Mai Tran
    Abstract: We show that a competitive equilibrium always exists in combinatorial auctions with anonymous graphical valuations and pricing, using discrete geometry. This is an intuitive and easy-to-construct class of valuations that can model both complementarity and substitutes, and to our knowledge, it is the first class besides gross substitutes that have guaranteed competitive equilibrium. We prove through counter-examples that our result is tight, and we give explicit algorithms for constructive competitive pricing vectors. We also give extensions to multi-unit combinatorial auctions (also known as product-mix auctions). Combined with theorems on graphical valuations and pricing equilibrium of Candogan, Ozdagar and Parillo, our results indicate that quadratic pricing is a highly practical method to run combinatorial auctions.
    Date: 2021–07
  10. By: James Malcomson
    Abstract: Employees are divided into grades. Toyota places suppliers into only a small number of categories. This paper shows that grouping of privately informed and persistent agent types arises naturally in relational incentive contracts when agent type is continuous. Malcomson (2016) showed that full separation is not possible if, following full revelation of an agent's type, payoffs for principal and agent are on the Pareto frontier.
    Keywords: persistent private information, renegotiation-proofness, type pooling, relational incentive contracts
    Date: 2021–07–26
  11. By: Stephan Zheng; Alexander Trott; Sunil Srinivasa; David C. Parkes; Richard Socher
    Abstract: AI and reinforcement learning (RL) have improved many areas, but are not yet widely adopted in economic policy design, mechanism design, or economics at large. At the same time, current economic methodology is limited by a lack of counterfactual data, simplistic behavioral models, and limited opportunities to experiment with policies and evaluate behavioral responses. Here we show that machine-learning-based economic simulation is a powerful policy and mechanism design framework to overcome these limitations. The AI Economist is a two-level, deep RL framework that trains both agents and a social planner who co-adapt, providing a tractable solution to the highly unstable and novel two-level RL challenge. From a simple specification of an economy, we learn rational agent behaviors that adapt to learned planner policies and vice versa. We demonstrate the efficacy of the AI Economist on the problem of optimal taxation. In simple one-step economies, the AI Economist recovers the optimal tax policy of economic theory. In complex, dynamic economies, the AI Economist substantially improves both utilitarian social welfare and the trade-off between equality and productivity over baselines. It does so despite emergent tax-gaming strategies, while accounting for agent interactions and behavioral change more accurately than economic theory. These results demonstrate for the first time that two-level, deep RL can be used for understanding and as a complement to theory for economic design, unlocking a new computational learning-based approach to understanding economic policy.
    Date: 2021–08

This nep-des issue is ©2021 by Guillaume Haeringer and Alex Teytelboym. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.