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on Economic Design |
| By: | Stephan Lauermann; Asher Wolinsky |
| Abstract: | Auction models are convenient abstractions of informal price formation processes that arise in markets for assets or services. These processes involve frictions such as bidder recruitment costs for sellers, participation costs for bidders, and limitations on sellers commitment abilities. This paper develops an auction model that captures such frictions. We derive several novel predictions; in particular, we find that outcomes are often inefficient, and the market sometimes unravels. |
| Keywords: | Auctions |
| JEL: | D44 |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:bon:boncrc:crctr224_2024_519&r=des |
| By: | Dirk Bergemann (Yale University); Tibor Heumann (Pontificia Universidad Catolica de Chile); Stephen Morris (Massachusetts Institute of Technology) |
| Abstract: | We characterize the bidders' surplus maximizing information structure in an optimal auction for a single unit good and related extensions to multi-unit and multi-good problems. The bidders seeks to find a balance between participation (and the avoidance of exclusion) and efficiency. The information structure that maximizes the bidders' surplus is given by a generalized Pareto distribution at the center of demand distribution, and displays complete information disclosure at either end of the Pareto distribution. |
| Date: | 2024–02–09 |
| URL: | http://d.repec.org/n?u=RePEc:cwl:cwldpp:2375r1&r=des |
| By: | Eduardo Perez-Richet; Vasiliki Skreta |
| Abstract: | We propose a mechanism design framework that incorporates both soft information, which can be freely manipulated, and semi-hard information, which entails a cost for falsification. The framework captures various contexts such as school choice, public housing, organ transplant and manipulations of classification algorithms. We first provide a canonical class of mechanisms for these settings. The key idea is to treat the submission of hard information as an observable and payoff-relevant action and the contractible part of the mechanism as a mapping from submitted scores to a distribution over decisions (a score-based decision rule). Each type report triggers a distribution over score submission requests and a distribution over decision rules. We provide conditions under which score-based mechanisms are without loss of generality. In other words, situations under which the agent does not make any type reports and decides without a mediator what score to submit in a score-based decision rule. We proceed to characterize optimal approval mechanisms in the presence of manipulable hard information. In several leading settings optimal mechanisms are score-based (and thus do not rely on soft information) and involve costly screening. The solution methodology we employ is suitable both for concave cost functions and quadratic costs and is applicable to a wide range of contexts in economics and in computer science. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.08031&r=des |
| By: | Yang Cai; Yingkai Li; Jinzhao Wu |
| Abstract: | This paper studies a joint design problem where a seller can design both the signal structures for the agents to learn their values, and the allocation and payment rules for selling the item. In his seminal work, Myerson (1981) shows how to design the optimal auction with exogenous signals. We show that the problem becomes NP-hard when the seller also has the ability to design the signal structures. Our main result is a polynomial-time approximation scheme (PTAS) for computing the optimal joint design with at most an $\epsilon$ multiplicative loss in expected revenue. Moreover, we show that in our joint design problem, the seller can significantly reduce the information rent of the agents by providing partial information, which ensures a revenue that is at least $1 - \frac{1}{e}$ of the optimal welfare for all valuation distributions. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.08145&r=des |
| By: | Martino Banchio; Aranyak Mehta; Andres Perlroth |
| Abstract: | We study the design of auctions with dynamic scoring, which allocate a single item according to a given scoring rule. We are motivated by online advertising auctions when users interact with a platform over the course of a session. The platform ranks ads based on a combination of bids and quality scores, and updates the quality scores throughout the session based on the user's online activity. The platform must decide when to show an ad during the session. By delaying the auction, the auctioneer acquires information about an ad's quality, improving her chances of selecting a high quality ad. However information is costly, because delay reduces market thickness and in turn revenue. When should the auctioneer allocate the impression to balance these forces? We develop a theoretical model to study the effect of market design on the trade-off between market thickness and information. In particular, we focus on first- and second-price auctions. The auctioneer can commit to the auction format, but not to its timing: her decision can thus be cast as a real options problem. We show that under optimal stopping the first-price auction allocates efficiently but with delay. Instead, the second-price auction generates more revenue by avoiding delay. The auctioneer benefits from introducing reserve prices, more so in a first-price auction. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.11022&r=des |
| By: | Malachy James Gavan; Antonio Penta; |
| Abstract: | We introduce Safe Implementation, a framework for implementation theory that adds to the standard requirements the restriction that agents’ deviations induce outcomes that are acceptable. Our primitives 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 questions, including robustness with respect to mistakes in play, behavioral considerations, state-dependent feasibility restrictions, limited commitment, etc. We provide results both for general solution concepts and for Nash Equilibrium. For the latter, we identify necessary and sufficient conditions (namely, Comonotonicity and safety-no veto) that restrict the joint behavior of the Social Choice and Acceptability Correspondences, which generalize Maskin’s (1977) conditions. We also show that these conditions are quite permissive in important economic applications, but also that Safe Implementation can be very demanding in environments with ‘rich’ preferences, regardless of the underlying solution concept. |
| Keywords: | Mechanism Design, Implementation, Robustness, Safe Implementation, Comonotonicity, Safe No-Veto |
| JEL: | C72 D82 |
| URL: | http://d.repec.org/n?u=RePEc:liv:livedp:202401&r=des |
| By: | Jerry Anunrojwong; Santiago R. Balseiro; Omar Besbes |
| Abstract: | In robust decision-making under non-Bayesian uncertainty, different robust optimization criteria, such as maximin performance, minimax regret, and maximin ratio, have been proposed. In many problems, all three criteria are well-motivated and well-grounded from a decision-theoretic perspective, yet different criteria give different prescriptions. This paper initiates a systematic study of overfitting to robustness criteria. How good is a prescription derived from one criterion when evaluated against another criterion? Does there exist a prescription that performs well against all criteria of interest? We formalize and study these questions through the prototypical problem of robust pricing under various information structures, including support, moments, and percentiles of the distribution of values. We provide a unified analysis of three focal robust criteria across various information structures and evaluate the relative performance of mechanisms optimized for each criterion against the others. We find that mechanisms optimized for one criterion often perform poorly against other criteria, highlighting the risk of overfitting to a particular robustness criterion. Remarkably, we show it is possible to design mechanisms that achieve good performance across all three criteria simultaneously, suggesting that decision-makers need not compromise among criteria. |
| Date: | 2024–03 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2403.12260&r=des |