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on Economic Design |
| By: | Markus Möller (University of Bonn) |
| Abstract: | I study a central authority’s ability to commit to a publicly announced mechanism in a one-to-one agent-object matching model. The authority announces a strategy-proof mechanism and then privately selects a mechanism to initiate a matching. An agent’s observation in form of the final matching has an innocent explanation (Akbarpour and Li, 2020), if given the agent’s reported preferences, there is a combination with other agents’ preferences leading to an identical observation under the announced mechanism. The authority can only commit up to safe deviations (Akbarpour and Li, 2020)—mechanisms that produce only observations with innocent explanations. For efficient or stable announcements, I show that no safe deviation exists if and only if the announced mechanism is dictatorial. I establish that the Deferred Acceptance (DA) Mechanism (Gale and Shapley, 1962) implies commitment to stability. Finally, I show that group strategy-proof and efficient announcements allow commitment to efficiency only if they are dictatorial. |
| Keywords: | Matching, Transparency, Partial Commitment, Strategy-Proof, Stability, Efficiency, DA, TTC |
| JEL: | C78 D47 D82 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:ajk:ajkdps:306&r= |
| By: | Qiufu Chen; Yuanmei Li; Xiaopeng Yin; Luosai Zhang; Siyi Zhou |
| Abstract: | Market design in one-to-one matching problems aims to establish an ideal mechanism ensuring stability with both stated and true preferences. However, the impossibility theorem in Roth (1982) reveals that no stable mechanism can satisfy strategy-proofness1. This paper focuses on exploring the Machiavellian frontier of stable mechanisms by weakening strategy-proofness. We aim to examine the extent to which we can relax strategy-proofness while either preserving or overturning Roth (1982)'s impossibility result. Three main results are demonstrated. Firstly, unless only one stable matching exists, no stable mechanism satisfies truncation-invariance, an axiom much weaker than strategy-proofness. Secondly, the M-optimal and W-optimal stable mechanisms satisfy truncation-proofness, an axiom weaker than truncation-invariance (and strategy-proofness). Lastly, truncation-proofness and stability are not logically interdependent; some stable mechanisms lack truncation-proofness, and some truncation-proof mechanisms are not stable. In addition, truncation-proofness and stability cannot characterize M-optimal and W-optimal stable mechanisms. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.12804&r= |
| By: | Pham, Hien |
| Abstract: | A monopolistic seller jointly designs allocation rules and (new) information about a pay-off relevant state to a buyer with private types. When the new information flips the ranking of willingness to pay across types, a screening menu of prices and threshold disclosures is optimal. Conversely, when its impact is marginal, bunching via a single posted price and threshold disclosure is (approximately) optimal. While information design expands the scope for random mechanisms to outperform their deterministic counterparts, its presence leads to an equivalence result regarding sequential versus. static screening. |
| Keywords: | mechanism design, information design, sequential screening, random mechanisms, bunching. |
| JEL: | D42 D82 D86 L15 |
| Date: | 2023–04–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:120989&r= |
| By: | Moshe Babaioff; Uriel Feige |
| Abstract: | We consider the problem of fair allocation of indivisible items to agents that have arbitrary entitlements to the items. Every agent $i$ has a valuation function $v_i$ and an entitlement $b_i$, where entitlements sum up to~1. Which allocation should one choose in situations in which agents fail to agree on one acceptable fairness notion? We study this problem in the case in which each agent focuses on the value she gets, and fairness notions are restricted to be {\em share based}. A {\em share} $s$ is an function that maps every $(v_i, b_i)$ to a value $s(v_i, b_i)$, representing the minimal value $i$ should get, and $s$ is {\em feasible} if it is always possible to give every agent $i$ value of at least $s(v_i, b_i)$. Our main result is that for additive valuations over goods there is an allocation that gives every agent at least half her share value, regardless of which feasible share-based fairness notion the agent wishes to use. Moreover, the ratio of half is best possible. More generally, we provide tight characterizations of what can be achieved, both ex-post (as single allocations) and ex-ante (as expected values of distributions of allocations), both for goods and for chores. We also show that for chores one can achieve the ex-ante and ex-post guarantees simultaneously (a ``best of both world" result), whereas for goods one cannot. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.14575&r= |
| By: | Yao Luo; Peijun Sang; Ruli Xiao |
| Abstract: | We establish nonparametric identification of auction models with continuous and nonseparable unobserved heterogeneity using three consecutive order statistics of bids. We then propose sieve maximum likelihood estimators for the joint distribution of the unobserved heterogeneity and the private value, as well as their conditional and marginal distributions. Lastly, we apply our methodology to a novel dataset from judicial auctions in China. Our estimates suggest substantial gains from accounting for unobserved heterogeneity when setting reserve prices. We propose a simple scheme that achieves nearly optimal revenue by using the appraisal value as the reserve price. |
| Keywords: | sieve estimation, nonseparable, measurement error, consecutive order statistics, judicial auctions |
| JEL: | C14 D44 |
| Date: | 2024–05–29 |
| URL: | https://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-776&r= |
| By: | Kunimoto, Takashi (School of Economics, Singapore Management University); Zhang, Cuiling (School of Economics, Singapore Management University) |
| Abstract: | Crémer and McLean (1988) show that the seller can extract full surplus almost always by an incentive compatible, individually rational mechanism in a single-unit auction model with a finite type space in which agents' beliefs are correlated and their valuations can be interdependent. We first show that this paradoxically positive result can be extended to a model of bilateral trades. To make it more realistic, we investigate when ex-post efficiency and ex-post budget balance in bilateral trades can also be achieved by an incentive compatible, individually rational mechanism. We identify a necessary condition for the existence of such mechanisms and show that it is also sufficient for a two-type model. We next show that the identified condition is not sufficient in general. Through a series of examples, we show that the imposition of ex post budget balance in a bilateral trade model induces a delicate interaction between interdependent values and correlated beliefs, so that the existence of incentive compatible, individually rational mechanisms becomes a very subtle problem. Finally, focusing on a model with linear valuations, we give the precise sense in which a possibility result under interdependent values is more fragile than that under private values. |
| Keywords: | bilateral trade; interdependence; correlation |
| JEL: | C72 D78 D82 |
| Date: | 2024–03–31 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:0000_000&r= |
| By: | Bo Cowgill; Jonathan M. V. Davis; B. Pablo Montagnes; Patryk Perkowski |
| Abstract: | A principal often needs to match agents to perform coordinated tasks, but agents can quit or slack off if they dislike their match. We study two prevalent approaches for matching within organizations: Centralized assignment by firm leaders and self-organization through market-like mechanisms. We provide a formal model of the strengths and weaknesses of both methods under different settings, incentives, and production technologies. The model highlights tradeoffs between match-specific productivity and job satisfaction. We then measure these tradeoffs with data from a large organization’s internal talent market. Firm-dictated matches are 33% more valuable than randomly assigned matches within job categories (using the firm’s preferred metric of quality). By contrast, preference-based matches (using deferred acceptance) are only 5% better than random but are ranked (on average) about 38 percentiles higher by the workforce. The self-organized match is positively assortative and helps workers grow new skills; the firm’s preferred match is negatively assortative and harvests existing expertise. |
| Keywords: | internal labor markets, assortative matching, assignment mechanisms, team formation, matching |
| JEL: | M50 D47 J40 |
| Date: | 2024 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_11120&r= |
| By: | Sudhir A. Shah (Department of Economics, Delhi School of Economics) |
| Abstract: | We formalise ‘bidding behaviour’ as a bidder’s choice of the ‘mean winning probability’ at the interim stage of first-price and second-price sealed bid auctions. This formulation simplifies and sharpens the anal-ysis of bidding behaviour by virtue of confining it to the unit interval. As an application, we show that the optimal mean winning probability increases if and only if the bidder’s valuation of the prize increases. Our formulation of bidding behaviour is rationalised by duality results showing that optimal mean winning probabilities correspond to opti-mal bid distributions. JEL Code: D44 |
| Keywords: | first-price auction, second-price auction, mean winning probability, bidding behaviour, duality |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:cde:cdewps:349&r= |
| By: | Thibaut Mastrolia; Tianrui Xu |
| Abstract: | Flaws of a continuous limit order book mechanism raise the question of whether a continuous trading session and a periodic auction session would bring better efficiency. This paper wants to go further in designing a periodic auction when both a continuous market and a periodic auction market are available to traders. In a periodic auction, we discover that a strategic trader could take advantage of the accumulated information available along the auction duration by arriving at the latest moment before the auction closes, increasing the price impact on the market. Such price impact moves the clearing price away from the efficient price and may disturb the efficiency of a periodic auction market. We thus propose and quantify the effect of two remedies to mitigate these flaws: randomizing the auction's closing time and optimally designing a transaction fees policy. Our results show that these policies encourage a strategic trader to send their orders earlier to enhance the efficiency of the auction market, illustrated by data extracted from Alphabet and Apple stocks. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.09764&r= |
| By: | Ahmadzadeh, Amirreza; Waizmann, Stephan |
| Abstract: | This paper studies how to combine screening menus and inspection in mechanism design. A Principal procures a good from an Agent whose cost is his private information. The Principal has three instruments: screening menus —i.e., quantities and transfers — and (ex-ante) inspection. Inspection is costly but reveals the Agent’s cost. The combination of inspection and screening menus mitigates inefficiencies: the optimal mechanism procures an efficient quantity from all Agents whose cost of production is sufficiently low, regardless of whether inspection has taken place. However, quantity distortions still necessarily occur in optimal regulation; the quantity procured from Agents with higher production costs is inefficiently low. Both results are true regardless of the magnitude of inspection costs. In contrast to settings without inspection, incentive compatibility con-straints do not bind locally. This paper provides a method to address this challenge, characterizing which constraints bind. |
| Keywords: | Mechanism Design; Verification; Principal-Agent; Inspection, Procurement |
| JEL: | D82 D86 L51 |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129335&r= |
| By: | Kunimoto, Takashi (School of Economics, Singapore Management University); Saran, Rene (Department of Economics, University of Cincinnati) |
| Abstract: | A social choice function (SCF) is robustly implementable in rationalizable strate-gies if every rationalizable strategy profile on every type space results in outcomes consistent with it. First, we establish an equivalence between robust implementation in rationalizable strategies and “weak rationalizable implementation”. Second, using the equivalence result, we identify weak robust monotonicity as a necessary and al-most sufficient condition for robust implementation in rationalizable strategies. This exhibits a contrast with robust implementation in interim equilibria, i.e., every equilib-rium on every type space achieves outcomes consistent with the SCF. Bergemann and Morris (2011) show that strict robust monotonicity is a necessary and almost sufficient condition for robust implementation in interim equilibria. We argue that strict robust monotonicity is strictly stronger than weak robust monotonicity, which further implies that, within general mechanisms, robust implementation in rationalizable strategies is more permissive than robust implementation in interim equilibria. The gap between robust implementation in rationalizable strategies and that in interim equilibria stems from the strictly stronger nonemptiness requirement inherent in the latter concept. |
| Keywords: | Ex post incentive compatibility; rationalizability; interim equilibrium; robust implementation; weak rationalizable implementation; weak robust monotonicity |
| JEL: | C72 D78 D80 |
| Date: | 2024–03–01 |
| URL: | https://d.repec.org/n?u=RePEc:ris:smuesw:2024_003&r= |
| By: | Ludovic A. Julien; Gagnie Pascal Yebarth |
| Abstract: | This paper explores the possibility that a taxation mechanism always implements a Pareto-optimal allocation in bilateral exchange when the market participants behave strategically and noncooperatively. To this end, we reconsider the taxation mechanism, namely the endowment taxation with transfers, implemented in the strategic bilateral exchange models by Gabszewicz and Grazzini (JPET, 1999). In this framework of strategic bilateral exchange, we consider a general class of smooth utility functions, and we determine the conditions under which the taxation mechanism is Pareto-optimal, i.e., whether there exists an equilibrium tax such that endowment taxation with transfers always implements a Pareto-optimal allocation. Furthermore, we explain why this taxation mechanism could implement a Pareto-optimal allocation. |
| Keywords: | Cournot-Nash equilibrium, Pareto-optimality, taxation |
| JEL: | C72 D41 H21 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:drm:wpaper:2024-19&r= |
| By: | Klajdi Hoxha |
| Abstract: | How do consultants price expertise? This paper studies a problem of selling information products (expertise) to a buyer (client) who faces decision-making problem under uncertainty. The client is privately informed about the type of expertise she needs and her willingness to pay (WTP) for additional information. A monopolist seller (consultant) designs and sells information products as Blackwell experiments over the underlying states associated with each client-specific desired expertise. Because there is correlation across states, a client with high WTP may find it profitable to purchase information about a low type's state, whenever correlation is sufficiently high. I find that the consultant can extract full (socially efficient) surplus whenever such (marginal) gains do not exceed the (marginal) costs of buying cheaper, but noisier information. Otherwise, unlike typical results in mechanism design, I find that buyers with low and sufficiently high value for information get no information rents, and only the "middle" types enjoy positive surplus. Common pricing structures observed in practice, like flat/hourly rates or value-based fees, are obtained as optimal contracts if correlation across states is sufficiently high or low, respectively. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.11142&r= |
| By: | Rochet, Jean-Charles |
| Abstract: | This expository article surveys the literature that has followed my paper"A Necessary and Sufficient Condition for Rationalizability in a Quasi-linear Context" that was published in the Journal of Mathematical Economics in 1987. |
| Keywords: | multidimensional screening; rationalizability; bunching; mechanism design |
| Date: | 2024–05–23 |
| URL: | http://d.repec.org/n?u=RePEc:tse:wpaper:129345&r= |
| By: | Michiel Kenis; Vladimir Dvorkin; Tim Schittekatte; Kenneth Bruninx; Erik Delarue; Audun Botterud |
| Abstract: | Policy makers are formulating offshore energy infrastructure plans, including wind turbines, electrolyzers, and HVDC transmission lines. An effective market design is crucial to guide cost-efficient investments and dispatch decisions. This paper jointly studies the impact of offshore market design choices on the investment in offshore electrolyzers and HVDC transmission capacity. We present a bilevel model that incorporates investments in offshore energy infrastructure, day-ahead market dispatch, and potential redispatch actions near real-time to ensure transmission constraints are respected. Our findings demonstrate that full nodal pricing, i.e., nodal pricing both onshore and offshore, outperforms the onshore zonal combined with offshore nodal pricing or offshore zonal layouts. While combining onshore zonal with offshore nodal pricing can be considered as a second-best option, it generally diminishes the profitability of offshore wind farms. However, if investment costs of offshore electrolyzers are relatively low, they can serve as catalysts to increase the revenues of the offshore wind farms. This study contributes to the understanding of market designs for highly interconnected offshore power systems, offering insights into the impact of congestion pricing methodologies on investment decisions. Besides, it is useful towards understanding the interaction of offshore loads like electrolyzers with financial support mechanisms for offshore wind farms. |
| Date: | 2024–05 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:2405.13169&r= |