nep-des New Economics Papers
on Economic Design
Issue of 2021‒09‒06
eleven papers chosen by
Alex Teytelboym
University of Oxford

  1. Uncertainty in Mechanism Design By Giuseppe Lopomo; Luca Rigotti; Chris Shannon
  2. Large mechanism design with moment-based allocation externality By Yamashita, Takuro; Sarkisian, Roberto
  3. Type-contingent Information Disclosure By Yamashita, Takuro; Zhu, Shuguang
  4. Two-Person Fair Division of Indivisible Items: Compatible and Incompatible Properties By Brams, Steven J.; Kilgour, Marc; Klamler, Christian
  5. Who Cares More? Allocation with Diverse Preference Intensities By Pietro Ortoleva; Evgenii Safonov; Leeat Yariv
  6. An Implementation Approach to Rotation Programs By Ville Korpela; Michele Lombardi; Riccardo D. Saulle
  7. Social optimality and stability of matchings in peer-to-peer ridesharing By Paolo Delle Site; André de Palma; Samarth Ghoslya
  8. Call of duty: Designated market maker participation in call auctions By Theissen, Erik; Westheide, Christian
  9. Asymmetric Shocks in Contests: Theory and Experiment By Daniel Houser; Jian Song
  10. Decentralized Payment Clearing using Blockchain and Optimal Bidding By Hamed Amini; Maxim Bichuch; Zachary Feinstein
  11. The Illiquidity of Water Markets By Donna, Javier D.; Espin-Sanchez, Jose-A.

  1. By: Giuseppe Lopomo; Luca Rigotti; Chris Shannon
    Abstract: This paper studies the design of mechanisms that are robust to misspecification. We introduce a novel notion of robustness that connects a variety of disparate approaches and study its implications in a wide class of mechanism design problems. This notion is quantifiable, allowing us to formalize and answer comparative statics questions relating the nature and degree of misspecification to sharp predictions regarding features of feasible mechanisms. This notion also has a behavioral foundation which reflects the perception of ambiguity, thus allowing the degree of misspecification to emerge endogenously. In a number of standard settings, robustness to arbitrarily small amounts of misspecification generates a discontinuity in the set of feasible mechanisms and uniquely selects simple, ex post incentive compatible mechanisms such as second-price auctions. Robustness also sheds light on the value of private information and the prevalence of full or virtual surplus extraction.
    Date: 2021–08
  2. By: Yamashita, Takuro; Sarkisian, Roberto
    Abstract: In many mechanism design problems in practice, often allocation externality exists (e.g., peer effects in student allocation, and post-license com- petition in oligopoly). Despite the practical importance, mechanism design with allocation externality has not been much explored in the literature, per- haps due to the tractability issue of the problem. In this paper, we propose a simple and tractable model of mechanism design with allocation externality. We characterize the optimal mechanism, which has a very simple form in the sense that it is identified by only a few parameters. This simplicity of the optimal mechanism is also useful to obtain comparative statics results.
    Keywords: Mechanism design; Allocation externality
    JEL: C72 D82 D86
    Date: 2021–08–30
  3. By: Yamashita, Takuro; Zhu, Shuguang
    Abstract: We study a mechanism design problem where the principal can also manipulate the agent’s information about a payoff-relevant state. Jointly designing information and allocation rule is proved equivalent to certain multi-dimensional screening problem. Based on this equivalence, when the agent’s types are positively-related, full disclosure is proved optimal under regularity conditions; while with negatively-related types, the optimal disclosure policy takes the form of a bad-state alert, which is in general a type-contingent disclosure policy. In a binary environment, we fully charac- terize the optimal mechanisms and discuss when type-contingent disclosure strictly benefits the principal and its welfare consequences.
    Keywords: Information design ; Bayesian persuasion; Mechanism design
    JEL: C72 D82 D86
    Date: 2021–08–30
  4. By: Brams, Steven J.; Kilgour, Marc; Klamler, Christian
    Abstract: Suppose two players wish to divide a finite set of indivisible items, over which each distributes a specified number of points. Assuming the utility of a player’s bundle is the sum of the points it assigns to the items it contains, we analyze what divisions are fair. We show that if there is an envy-free (EF) allocation of the items, two other desirable properties—Pareto-optimality (PO) and maximinality (MM)—can also be satisfied, rendering these three properties compatible, but other properties—balance (BL), maximum Nash welfare (MNW), maximum total welfare (MTW), and lexicographic optimality (LO)—may fail. If there is no EF division, as is likely, it is always possible to satisfy EFx, a weaker form of EF, but an EFx allocation may not be PO, BL, MNW, MTW, or LO. Moreover, if one player considers an item worthless (i.e., assigns zero points to it), an EFx division may be Pareto dominated by a nonEFx allocation that is MNW. Although these incompatibilities suggest that there is no “perfect” 2-person fair division of indivisible items, EFx and MNW divisions—if they give different allocations when there is no EF-PO-MM division—seem the most compelling alternatives, with EFx, we conjecture, satisfying the Rawlsian objective of helping the worse-off player and MNW, a modification of MTW, suggesting a more Benthamite view.
    Keywords: Two-person fair division; indivisible items; envy-freeness
    JEL: C7 C71 D6 D61 D63
    Date: 2021–08
  5. By: Pietro Ortoleva; Evgenii Safonov; Leeat Yariv
    Abstract: Goods and services -- public housing, medical appointments, schools -- are often allocated to individuals who rank them similarly but differ in their preference intensities. We characterize optimal allocation rules when individual preferences are known and when they are not. Several insights emerge. First-best allocations may involve assigning some agents "lotteries" between high- and low-ranked goods. When preference intensities are private information, second-best allocations always involve such lotteries and, crucially, may coincide with first-best allocations. Furthermore, second-best allocations may entail disposal of services. We discuss a market-based alternative and show how it differs.
    Date: 2021–08
  6. By: Ville Korpela (Turku School of Economics, University of Turku); Michele Lombardi (Adam Smith Business School, University of Glasgow and DSES, University of Napoli Federico II); Riccardo D. Saulle (Department of Economics and Management, University of Padova)
    Abstract: Rotation programs are widely used in societies. Some examples are job rotations, rotation schemes in the management of common-pool resources, and rotation procedures in fair division problems. We study rotation programs via the implementation of Pareto efficient social choice rules under complete information. The notion of the rotation program predicts the outcomes. A rotation program is a myopic stable set whose states are arranged circularly, and agents can effectively move only between two consecutive states. We provide characterizing conditions for the implementation in rotation programs and show that, for multi-valued rules, our notion of rotation monotonicity is necessary and sufficient for implementation. Finally, we identify two classes of assignment problems that are implementable in rotation programs.
    Keywords: Rotation Programs, Job Rotation, Assignment Problems, Implementation, Right Structures, Stability
    JEL: C71 D71 D82
    Date: 2021–04
  7. By: Paolo Delle Site; André de Palma; Samarth Ghoslya (CY Cergy Paris Université, THEMA)
    Abstract: Peer-to-peer ridesharing, where drivers are also travellers, can alleviate congestion and emissions that plague cities by increasing vehicle occupancy. We propose a socially optimal ridesharing scheme, where a social planner matches passengers and drivers in a way that minimizes travel costs (travel time and fuel) plus environmental costs. The contribution helps in computing the socially optimal ridesharing schemes for networks of any topology within a static framework of route choice with exogenously fixed travel times. A linear programming problem is formulated to compute the optimal matchings. Existence, integrality and uniqueness properties are investigated. The social planner receives a payment from passengers and rewards drivers for the higher costs they bear. Passengers and drivers never incur a loss because travelling alone remains always an option, but matchings may need to be subsidised. The socially optimal matching solution without environmental costs is proved to satisfy the stability property according to which no pair of passenger and driver prefers each other to any of the current partners. In the Sioux Falls network, when 20% of individuals are willing to rideshare, with 80% of passengers travelling by car and 20% by public transport, 17.37% optimally do so, resulting in a 7.05% decrease in CO2 emissions on the all-travel-alone scenario.
    Keywords: environment, matching stability, optimization, ridesharing, socially optimal matching
    JEL: C78 R40 R48
    Date: 2021
  8. By: Theissen, Erik; Westheide, Christian
    Abstract: Many equity markets combine continuous trading and call auctions. Oftentimes designated market makers (DMMs) supply additional liquidity. Whereas prior research has focused on their role in continuous trading, we provide a detailed analysis of their activity in call auctions. Using data from Germany's Xetra system, we find that DMMs are most active when they can provide the greatest benefits to the market, i.e., in relatively illiquid stocks and at times of elevated volatility. Their trades stabilize prices and they trade profitably.
    Keywords: Designated market makers,Call auctions
    JEL: G10
    Date: 2021
  9. By: Daniel Houser (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University); Jian Song (Interdisciplinary Center for Economic Science and Department of Economics, George Mason University)
    Abstract: Under optimal tournament design, we would expect agents to exert identical effort regardless of the shape of the contest function’s error component. We report data from laboratory experiments that provide a first test of this prediction. We find that efforts do not significantly differ when the shock distribution exhibits negative skewness versus a uniform distribution; however, subjects react substantially differently to random shock realizations under different treatments. Specifically, tournament winners demonstrate stronger reactions, economically and statistically, to negatively-skewed shocks than to uniform shocks. Meanwhile, tournament losers are less likely to be affected by negatively-skewed shocks. Our results highlight the importance of accounting for the influence of the shape of the shock distribution on a contest participant’s effort.
    Keywords: Asymmetric random shock, Tournament, Winner, Loser, Laboratory experiment
    JEL: D90 M52 C90
    Date: 2021–07
  10. By: Hamed Amini; Maxim Bichuch; Zachary Feinstein
    Abstract: In this paper, we construct a decentralized clearing mechanism which endogenously and automatically provides a claims resolution procedure. This mechanism can be used to clear a network of obligations through blockchain. In particular, we investigate default contagion in a network of smart contracts cleared through blockchain. In so doing, we provide an algorithm which constructs the blockchain so as to guarantee the payments can be verified and the miners earn a fee. We, additionally, consider the special case in which the blocks have unbounded capacity to provide a simple equilibrium clearing condition for the terminal net worths; existence and uniqueness are proven for this system. Finally, we consider the optimal bidding strategies for each firm in the network so that all firms are utility maximizers with respect to their terminal wealths. We first look for a mixed Nash equilibrium bidding strategies, and then also consider Pareto optimal bidding strategies. The implications of these strategies, and more broadly blockchain, on systemic risk are considered.
    Date: 2021–09
  11. By: Donna, Javier D.; Espin-Sanchez, Jose-A.
    Abstract: We investigate the efficiency of a market relative to a non-market institution—an auction relative to a quota—as allocation mechanisms in the presence of frictions. We use data from water markets in southeastern Spain and explore a specific change in the institutions to allocate water. On the one hand, frictions arose because poor farmers were liquidity constrained. On the other hand, wealthy farmers who were part of the wealthy elite were not liquidity constrained. We estimate a structural dynamic demand model under the market by taking advantage that water demand for both types of farmers is determined by the technological constraint imposed by the crop’s production function. This approach allows us to differentiate liquidity constraints from unobserved heterogeneity. We use the estimated model to compute welfare under market and non-market institutions. We show that the institutional change from markets to quotas increased efficiency for the farmers considered.
    Keywords: Market Efficiency, Dynamic Demand, Auctions, Quotas, Vertical Integration, Financial Markets
    JEL: D02 G14 L11 L13 L42 L50 Q25
    Date: 2021–04–05

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