nep-des New Economics Papers
on Economic Design
Issue of 2022‒03‒14
eleven papers chosen by
Alex Teytelboym
University of Oxford

  1. Targeted Vouchers, Competition Among Schools, and the Academic Achievement of Poor Students By Christopher A. Neilson
  2. Smart Matching Platforms and Heterogeneous Beliefs in Centralized School Choice By Felipe Arteaga; Adam J. Kapor; Christopher A. Neilson; Seth D. Zimmerman
  3. Aftermarket Frictions and the Cost of Off Platform Options In Centralized Assignment Mechanisms By Adam Kapor; Mohit Karnani; Christopher Neilson
  4. School Choice with Consent: An Experiment By Cerrone, Claudia; Hermstrüwer, Yoan; Kesten, Onur
  5. Task Allocation and On-the-job Training By Mariagiovanna Baccara; SangMok Lee; Leeat Yariv
  6. Who Cares More? Allocation with Diverse Preference Intensities By Pietro Ortoleva; Evgenii Safonov; Leeat Yariv
  7. Lindahl Equilibrium as a Collective Choice Rule By Faruk R. Gul; Wolfgang Pesendorfer
  8. Random Evolving Lotteries and Intrinsic Preference for Information By Faruk Gul; Paulo Natenzon; Wolfgang Pesendorfer
  9. Flow Trading By Eric Budish; Peter Cramton; Albert S. Kyle; Jeongmin Lee; David Malec
  10. On Market Design and Latency Arbitrage By Wolfgang Kuhle
  11. Coalition Formation Under Dominance Invariance By Kimya, Mert

  1. By: Christopher A. Neilson (Princeton University)
    Abstract: I develop a model of supply and demand with imperfect competition to study the primary education market in Chile. I use this framework to empirically analyze how voucher policy affects competitive incentives for schools to supply quality. First, I show descriptive and causal evidence that the introduction of a voucher targeted at poorer students led private schools to improve quality, especially in the poorest neighborhoods. Then, I use my estimated demand model to quantify the mechanisms that incentivized for-profit schools to improve. My estimates indicate that schools mark down quality below the competitive benchmark, and this markdown is larger in poorer areas. The targeted voucher policy induced nuanced changes in the two mechanisms that drive the observed improvements in quality in my model market power and marginal revenue. The results indicate that the policy improved equity by providing more resources and increasing competition in neighborhoods where incentives to invest in quality are weakest.
    Keywords: School Choice, School Competition, Targeted Vouchers, Market Power, Chile
    JEL: I20
    Date: 2021–05
  2. By: Felipe Arteaga (University of California at Berkley); Adam J. Kapor (Princeton University); Christopher A. Neilson (Princeton University); Seth D. Zimmerman (Yale University)
    Abstract: Many school districts with centralized school choice adopt strategyproof assignment mechanisms to relieve applicants of the need to strategize on the basis of beliefs about their own admissions chances. This paper shows that beliefs about admissions chances shape choice outcomes even when the assignment mechanism is strategyproof by influencing the way applicants search for schools, and that "smart matching platforms" that provide live feedback on admissions chances help applicants search more effectively. Motivated by a model in which applicants engage in costly search for schools and over-optimism can lead to under-search, we use data from a largescale survey of choice participants in Chile to show that learning about schools is hard, that beliefs about admissions chances guide the decision to stop searching, and that applicants systematically underestimate non-placement risk. We then use RCT and RD research designs to evaluate live feedback policies in the Chilean and New Haven choice systems. 22% of applicants submitting applications where risks of non-placement are high respond to warnings by adding schools to their lists, reducing non-placement risk by 58%. These results replicate across settings and over time. Reducing the strategic burden of school choice requires not just strategyproofness inside the centralized system, but also choice supports for the strategic decisions that inevitably remain outside of it.
    Keywords: education, schools
    JEL: D83 H75 I2 J01
    Date: 2021–06
  3. By: Adam Kapor (Princeton University); Mohit Karnani (MIT); Christopher Neilson (Princeton University)
    Abstract: In many settings, market designers must contend with the presence of firms which they do not directly control and who do not participate in the “designed†portion of the market. We study the case of a decentralized “off-platform†aftermarket which operates jointly with a centralized college admissions platform in Chile. We evaluate the impacts of this aftermarket on college enrollment, persistence, graduation, and students’ welfare. To do so, we exploit a policy change in 2012 which caused a significant number of off-platform higher education programs to join the platform. We show that the share of students declining their placed spot decreased by 8%, dropout rates at the end of the first year of college dropped by 2 percentage points (a16% drop) and graduation within six years increased by 2 to 5 percentage points following this event. To quantify welfare impacts and decompose channels, we develop and estimate an empirical model of college applications, aftermarket waitlists, and matriculation choices using detailed individual-level administrative data from Chile on almost half a million applicants. According to model estimates, welfare increases substantially, especially for less advantaged students and for women, following the policy change. Counterfactual analysis suggests that more desirable options generate larger negative externalities when not on the platform. These externalities are driven by students who receive and decline on-platform offers, and are amplified by substantial frictions in waitlists. Our results indicate that platform design and the scope of the platform can have real impacts on outcomes of interest.
    Keywords: Chile, Mechanism Design, Off Platform Design, College Admissions, College Enrollment
    JEL: D82 I20 I23
    Date: 2020–10
  4. By: Cerrone, Claudia; Hermstrüwer, Yoan; Kesten, Onur
    Abstract: Public school choice often yields student placements that are neither fair nor efficient. Kesten (2010) proposed an efficiency-adjusted deferred acceptance algorithm (EADAM) that allows students to consent to waive priorities that have no effect on their assignment. In this article, we provide first experimental evidence on the performance of EADAM. We compare EADAM with the deferred acceptance mechanism (DA) and with two variants of EADAM. In the first variant, we vary the default option: students can object – rather than consent – to the priority waiver. In the second variant, the priority waiver is enforced. We find that both efficiency and truth-telling rates are substantially higher under EADAM than under DA, even though EADAM is not strategy-proof. When the priority waiver is enforced, we observe that efficiency further increases, while truth-telling rates decrease relative to the EADAM variants where students can decide to eschew the waiver. Our results challenge the importance of strategy-proofness as a condition of truth-telling and point at a trade-off between efficiency and vulnerability to preference manipulation.
    Keywords: efficiency-adjusted deferred acceptance algorithm; school choice; consent; default rules; law
    Date: 2021–10
  5. By: Mariagiovanna Baccara (Washington University); SangMok Lee (Washington University); Leeat Yariv (Princeton University)
    Abstract: We study dynamic task allocation when providers' expertise evolves endogenously through training. We characterize optimal assignment protocols and compare them to discretionary procedures, where it is the clients who select their service providers. Our results indicate that welfare gains from centralization are greater when tasks arrive more rapidly, and when training technologies improve. Monitoring seniors' backlog of clients always increases welfare but may decrease training. Methodologically, we explore a matching setting with endogenous types, and illustrate useful adaptations of queueing theory techniques for such environments.
    Keywords: Dynamic Matching, Training-by-Doing, Market Design
    JEL: D47 M53
    Date: 2021–09
  6. By: Pietro Ortoleva (Princeton University); Evgenii Safonov (Princeton University); Leeat Yariv (Princeton University)
    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.
    Keywords: : Market Design, Mechanism Design, Allocation Problems
    JEL: C78 D02 D47
    Date: 2021–08
  7. By: Faruk R. Gul (Princeton University); Wolfgang Pesendorfer (Princeton University)
    Abstract: A collective choice problem is a finite set of social alternatives and a finite set of economic agents with vNM utility functions. We associate a public goods economy with each collective choice problem and establish the existence and efficiency of (equal income) Lindahl equilibrium allocations. We interpret collective choice problems as cooperative bargaining problems and define a set-valued solution concept, the equitable solution (ES).We provide axioms that characterize ES and show that ES contains the Nash bargaining solution. Our main result shows that the set of ES payoffs is the same a the set of Lindahl equilibrium payoffs. We consider two applications: in the first, we show that in a large class of matching problems without transfers the set of Lindahl equilibrium payoffs is the same as the set of (equal income) Walrasian equilibrium payoffs. In our second application, we show that in any discrete exchange economy without transfers every Walrasian equilibrium payoff is a Lindahl equilibrium payoff of the corresponding collective choice market. Moreover, for any cooperative bargaining problem, it is possible to define a set of commodities so that the resulting economy’s utility possibility set is that bargaining problem and the resulting economy’s set of Walrasian equilibrium payoffs is the same as the set of Lindahl equilibrium payoffs of the corresponding collective choice market.
    Keywords: collective choice
    JEL: D70 D71
    Date: 2021–04
  8. By: Faruk Gul (Princeton University); Paulo Natenzon (Washington University in St. Louis); Wolfgang Pesendorfer (Princeton University)
    Abstract: We introduce random evolving lotteries to study preference for non-instrumental information. Each period, the agent enjoys a flow payoff from holding a lottery that will resolve at the terminal date. We provide a representation theorem for non-separable risk consumption preferences and use it to characterize information seeking and its opposite, information aversion. To address applications, we characterize peak-trough utilities that aggregate trajectories of flow utilities linearly but, in addition, put weight on the best (peak) and worst (trough) lotteries along each path. We identify conditions for the ostrich effect, decision makers’ tendency to prefer information after good news to information after bad news. Our model permits savoring (enjoying the gradual arrival of good and sudden arrival of bad news) and dread (disliking the gradual arrival of bad and sudden arrival of good news) and a preference for skewed information
    Keywords: Information; Lotteries; Lottery; Preference
    JEL: D11 D44 D83
    Date: 2020–10
  9. By: Eric Budish (University of Chicago, Booth School of Business); Peter Cramton (University of Cologne and University of Maryland); Albert S. Kyle (University of Maryland); Jeongmin Lee (Olin Business School, Washington University in St.Louis); David Malec (University of Cologne and University of Maryland)
    Abstract: We propose a new market design for trading financial assets. The design combines three elements: (1) Orders are downward-sloping linear demand curves with quantities expressed as flows; (2)Markets clear in discrete time using uniform-price batch auctions; (3) Traders may submit orders for portfolios of assets, expressed as arbitrary linear combinations with positive and negative weights. Thus, relative to the status quo design: time is discrete instead of continuous, prices and quantities are continuous instead of discrete, and traders can directly trade arbitrary portfolios. Clearing prices and quantities are shown to exist, with the latter unique, despite the wide variety of preferences that can be expressed via portfolio orders; calculating prices and quantities is shown to be computationally feasible; microfoundations for portfolio orders are provided. The proposal addresses six concerns with the current market design: (1) sniping and the speed race; (2) the complexities and inefficiencies caused by tick-size constraints; (3) the cost and complexity of trading large quantities over time, (4) of trading portfolios, and (5) of providing liquidity in correlated assets; (6) fairness and transparency of optimal execution.
    Date: 2022–02
  10. By: Wolfgang Kuhle
    Abstract: We argue that contemporary stock market designs are, due to traders' inability to fully express their preferences over the execution times of their orders, prone to latency arbitrage. In turn, we propose a new order type which allows traders to specify the time at which their orders are executed after reaching the exchange. Using this order type, traders can synchronize order executions across different exchanges, such that high-frequency traders, even if they operate at the speed of light, can no-longer engage in latency arbitrage.
    Date: 2021–12
  11. By: Kimya, Mert
    Abstract: An abstract game satisfies Dominance Invariance if the indirect and the direct dominance relations, or myopic and farsighted dominance, are equivalent. Mauleon, Molis, Vannetelbosch, and Vergote (2014) study Dominance Invariance in match- ing problems as an attractive condition that eliminates the differences between a farsighted solution concept and its myopic counterpart. We show that Dominance Invariance can also be used to eliminate the differences between various farsighted solution concepts in any abstract game. Together with an additional condition called No Infinite Chains, Dominance Invariance implies the existence and unique- ness of the farsighted stable set, its equivalence to the largest consistent set and its equivalence to the (strong) rational expectations farsighted stable set when the latter exists. This also implies that both the farsighted stable set and the largest consistent set do not su er from the problem of maximality under these conditions.
    Keywords: Farsighted stability; Coalitional games; Farsighted stable set; Largest Consistent Set
    Date: 2021–06

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