nep-des New Economics Papers
on Economic Design
Issue of 2022‒11‒14
six papers chosen by
Guillaume Haeringer, Baruch College and Alex Teytelboym, University of Oxford

  2. Safe Implementation By Gavan, Malachy James; Penta, Antonio
  3. Market Effects of Sponsored Search Auctions By Motta, Massimo; Penta, Antonio
  4. Greedy Transaction Fee Mechanisms for (Non-)myopic Miners By Yotam Gafni; Aviv Yaish
  5. The Design and Regulation of Exchanges: A Formal Approach By Mohit Garg; Suneel Sarswat
  6. On blocking mechanisms in economies with club goods By Bhowmik, Anuj; Saha, Sandipan

  1. By: Andrew MACKENZIE; Yu ZHOU
    Abstract: We consider a model of tract housing where buyers and sellers have (i) wealth constraints, and (ii) unit demand over identical indivisible objects represented by a valuation. First, we characterize the strong core. Second, we characterize the bilat- eral weak core, or the weak core allocations with no side-payments. Finally, when buyer wealth constraints and valuations are private information and when trans- fers are discrete, we introduce two families of pendulum auctions, both of which consist of obviously strategy-proof selections of the bilateral weak core. The buyer- optimal pendulum auctions are preferred by the buyers but are inefficient when side-payments are possible, while the efficient pendulum auctions are efficient
    Keywords: tract housing, core, pendulum auction, almost-synchronized equilibrium, private wealth constraints, efficiency, obvious strategy-proofness
    JEL: C72 D41 D47 D82
    Date: 2022–08
  2. By: Gavan, Malachy James; Penta, Antonio
    Abstract: We introduce Safe Implementation, a notion of implementation that adds to the standard requirements the restriction that deviations from the baseline solution concept induce outcomes that are acceptable. The primitives of Safe Implementation therefore include both a Social Choice Correspondence, as standard, and an Acceptability Correspondence, each mapping every state of the world to a subset of allocations. This framework generalizes standard notions of implementation, and can accommodate a variety of considerations, including robustness concerns with respect to mistakes in play, model misspecification, behavioral considerations, state-dependent feasibility restrictions, limited commitment, etc. We provide results both for general solution concepts and for the case in which agents’ interaction is modelled by Nash Equilibrium. In the latter case, we identify necessary and sufficient conditions (namely, Comonotonicity and safety-no veto) that restrict the joint behavior of the Social Choice and Acceptability Correspondences. These conditions are more stringent than Maskin’s (1978), but coincide with them when the safety requirements are vacuous. We also show that these conditions are quite permissive in important economic applications, such as environments with single-crossing preferences and in problems of efficient allocation of in-divisible goods, but also that Safe Implementation can be very demanding in environments with ‘rich’ preferences, regardless of the underlying solution concept.
    Keywords: Comonotonicity; mechanism design; implementation; robustness; resilience; safe implementation; safety no-veto
    JEL: C72 D82
    Date: 2022–10–11
  3. By: Motta, Massimo; Penta, Antonio
    Abstract: We investigate the market effects of brand search advertising, within a model where two firms simultaneously choose the price of their (differentiated) product and the bids for the advertising auction which is triggered by own and rival’s brand keywords search; and where there exist sophisticated/attentive consumers (who look for any available in-formation on their screen) and naive/inattentive consumers (who only look at the top link of their screen), both aware of either brand’s characteristics and price. Relative to a benchmark where only organic search exists, in any symmetric equilibrium each firm wins its own brand auction, and advertising has detrimental effects on welfare: (i) the sponsored link crowds out the rival’s organic link, thus reducing competition and choice, and leading to price increases; (ii) the payment of the rival’s bid (may) raise marginal cost, also contributing to raise market prices. Under extreme asymmetry (there is an incumbent and an unknown new entrant), we do find that the market effect of brand bidding might be beneficial, if the search engine does not list the entrant’s link in organic search, and the share of the sophisticated consumers in the economy is large enough for an equilibrium in which the entrant wins the advertising auction on the search for the incumbent’s brand to exist.
    Keywords: Digital advertising; auctions; oligopoly; search engines; brands; horizontal agreements
    Date: 2022–10–11
  4. By: Yotam Gafni; Aviv Yaish
    Abstract: Decentralized cryptocurrencies are payment systems that rely on aligning the incentives of users and miners to operate correctly and offer a high quality of service to their users. Recent literature studies the mechanism design problem of the auction serving as the transaction fee mechanism (TFM). We show that while the protocol that requires a user to ``pay as bid'' and greedily chooses among available transactions based on their fees is not dominant strategy incentive-compatible (DSIC) for users, it has a Bayesian-Nash equilibrium (BNE) where bids are slightly shaded. Relaxing this incentive compatibility requirement circumvents the impossibility result of [16] and allows for an approximately revenue and welfare optimal, myopic miners incentive-compatibility (MMIC), and off-chain-agreement (OCA)-proof mechanism. We prove its guarantees using different benchmarks, and in particular, show it is the revenue optimal Bayesian incentive-compatible (BIC), MMIC and 1-OCA-proof mechanism among a large class of mechanisms. We move beyond the myopic model to a model where users offer transaction fees for their transaction to be accepted, as well as report their urgency level by specifying the time to live (TTL) of the transaction, after which it expires. We show guarantees provided by the greedy allocation rule, as well as a better-performing non-myopic rule. The above analysis is stated in terms of a cryptocurrency TFM, but applies to other settings, such as cloud computing and decentralized ``gig'' economy, as well.
    Date: 2022–10
  5. By: Mohit Garg; Suneel Sarswat
    Abstract: We use formal methods to specify, design, and monitor continuous double auctions, which are widely used to match buyers and sellers at exchanges of foreign currencies, stocks, and commodities. We identify three natural properties of such auctions and formally prove that these properties completely determine the input-output relationship. We then formally verify that a natural algorithm satisfies these properties. All definitions, theorems, and proofs are formalized in an interactive theorem prover. We extract a verified program of our algorithm to build an automated checker that is guaranteed to detect errors in the trade logs of exchanges if they generate transactions that violate any of the natural properties.
    Date: 2022–10
  6. By: Bhowmik, Anuj; Saha, Sandipan
    Abstract: The paper investigates some classical results concerning the core and competitive equilibria in an economy consisting of both private and club goods, where club goods are treated as articles of choice just like private goods. Clubs in this framework are described by the characteristic of their members and the local project the club endorses. The space of economic agents in our economy is described by a measure space of agents which includes both negligible and non-negligible agents. The competitive equilibria notion in our setup is known as the club equilibria. In this paper, we establish three results: (i) equivalence between the core (resp. club equilibria) of a mixed economy with the core (resp. club equilibria) of its associated continuum economy, which extends the classical core-equivalence theorem of Ellickson et al. \cite{Ellickson et al} to the case of a mixed economy; (ii) extensions of Schmeidler's theorem (refer to \cite{Schmeidler : 72}) and Vind's theorem (refer to \cite{Vind : 72}) to a club economy with a mixed measure space of agents, which provides a sharper characterization of club equilibrium states; and (iii) characterizations of club equilibria in a mixed economy by considering the veto power of the grand coalition in infinitely many economies obtained by perturbation of initial endowments in the original economy.
    Keywords: Club goods, Vind's theorem, Mixed economies, Core equivalence, $\varepsilon$-Robust efficiency
    JEL: D2 D5 D6 D7 H4
    Date: 2022–10–10

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