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on Economic Design |
| By: | Eric Yan |
| Abstract: | We show the existence of mechanism design settings where the social planner has an interest in players receiving noisy signals about the types of other agents. When the social planner is interested only in partial implementation, any social choice rule that is incentive compatible after players receive additional information about other agents was originally incentive compatible prior to the change in information structure. However, information about other agents can eliminate undesired equilibria in an implementing mechanism. Thus, there are social choice rules which are not fully implementable in a given information environment that become fully implementable after players have additional information about the types of other agents. We provide some general conditions under which an undesired equilibrium can be eliminated by additional information about other players. |
| Date: | 2024–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.00037 |
| By: | Steve Kivinen (University of Graz, Austria) |
| Abstract: | Equal treatment of equals (ETE) is a foundational notion of fairness. However, there are rules that violate ETE while still exhibiting procedural fairness by granting agents symmetric roles. We define weak equity and k-equity (Bartholdi et al., 2021) in a general environment. We show that 2-equity implies ETE under a mild separability condition. Weak equity defines a rich class of rules that often violate ETE. In the fair division environment of Sprumont (1991), we characterize the uniform rule, and sequential allotment rules with equal guarantees (Barbera et al., 1997). Weak equity can give one agent nearly the entire surplus over identical agents. |
| Keywords: | anonymity, equity, fair division. |
| JEL: | C60 D63 D71 |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2024-04 |
| By: | Ortega, Josué; Ziegler, Gabriel; Arribillaga, R. Pablo |
| Abstract: | The Efficiency-Adjusted Deferred Acceptance (EADA) mechanism addresses the Pareto inefficiency of the celebrated Deferred Acceptance (DA) algorithm by assigning every student to a weakly more preferred school. However, it remains uncertain which and how many students do not see an improvement in their DA placement under EADA. We show that, despite its advantages, EADA does not benefit students assigned to their worst-ranked schools or those who remain unmatched under DA. Additionally, it limits the placement improvement of marginalized students, thereby maintaining school segregation. The placement of worst-off students under EADA can be exceptionally poor, even though significantly more egalitarian allocations are possible. Lastly, we provide a bound on the expected number of unimproved students using a random market approach valid for small markets. Our findings shed light on why EADA fails to mitigate the inequality produced by DA in empirical evaluations. |
| Keywords: | School choice, efficiency-adjusted deferred acceptance |
| JEL: | C78 D47 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qmsrps:202405 |
| By: | Navin Kartik; Andreas Kleiner |
| Abstract: | For multidimensional Euclidean type spaces, we study convex choice: from any choice set, the set of types that make the same choice is convex. We establish that, in a suitable sense, this property characterizes the sufficiency of local incentive constraints. Convex choice is also of interest more broadly. We tie convex choice to a notion of directional single-crossing differences (DSCD). For an expected-utility agent choosing among lotteries, DSCD implies that preferences are either one-dimensional or must take the affine form that has been tractable in multidimensional mechanism design. |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2406.19063 |
| By: | Mario Gilli; Andrea Sorrentino |
| Abstract: | We characterise the set of equilibria in a deterministic group contest with the weakest-link impact function, continuous efforts and a private good prize, complementing the results obtained by Chowdhury et al. (2016). We consider a two-stages two-groups model, where in the first stage the agents simultaneously choose the sharing rule, while in the second stage they choose efforts. Despite the existence of within-group symmetric Nash equilibria in pure strategies in the effort stage, there are combinations of possible sharing rules such that no pure strategy effort equilibria exist, hence for these sharing rules, the continuation payoffs are not defined, so that there exist no subgame perfect Nash equilibria in pure stragies. However, limiting ourselves to the restricted sharing rules case, we are able to state that there are continua of subgame perfect equilibria. In this case, by additional restrictions on the effort levels of each class of effort equilibria, we are able to computationally characterise the set of subgame perfect equilibria in pure strategies. |
| Keywords: | Group contests, sharing rules, indeterminacy. |
| JEL: | D74 D71 C72 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:mib:wpaper:541 |
| By: | Piazolo, David; Vanberg, Christoph |
| Abstract: | We present a three-person, two-period bargaining game with private information. A single proposer is seeking to secure agreement to a proposal under either majority or unanimity rule. If the first period proposal fails, the game ends immediately with an exogenously given “breakdown” probability. Two responders have privately known disagreement payoffs. We characterize Bayesian equilibria in stagewise undominated strategies. Our central result is that responders have a signaling incentive to vote “no” on the first proposal under unanimity rule, whereas no such incentive exists under majority rule. The reason is that being perceived as a “high breakdown value type” is advantageous under unanimity rule, but disadvantageous under majority rule. As a consequence, responders are “more expensive” under unanimity rule and disagreement is more likely. These results confirm intuitions that have been stated informally before and in addition yield deeper insights into the underlying incentives and what they imply for optimal behavior in bargaining with private information. |
| Keywords: | Bargaining; voting; unanimity rule; majority rule; private information; signaling |
| Date: | 2024–07–27 |
| URL: | https://d.repec.org/n?u=RePEc:awi:wpaper:0753 |
| By: | Anton Kolotilin (School of Economics, UNSW Business School); Hongyi Li (School of Economics, UNSW Business School); Andriy Zapechelnyuk (School of Economics, University of Edinburgh) |
| Abstract: | We study monotone persuasion in the linear case, where a posterior distribution over states is summarized by its mean. We identify two settings where the optimal unrestricted signal can be nonmonotone. In the first setting, the optimal unrestricted signal requires randomization. In the second setting, the optimal unrestricted signal entails nonmonotone pooling of states. We solve for the optimal monotone signal in each setting, and illustrate our results with an application to media censorship. |
| Keywords: | Bayesian persuasion, monotone persuasion |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:swe:wpaper:2024-05 |
| By: | Jin Yeub Kim (Yonsei University); Jong Jae Lee (The Catholic University of Korea) |
| Abstract: | This paper presents a theory of mediator selection in conflicts that compares biased mediation and unbiased mediation. We determine when and how parties in dispute accept a biased mediator, and characterize optimal mechanisms used by biased mediators when they are selected into mediation in equilibrium. When asymmetric information is significant, parties accept biased mediation as long as the degree of mediator bias is not too high. Biased mediators care more about the payoffs of their favored party. Nevertheless, we find that biased mediators can be equally effective in promoting peace as the unbiased mediator. This implies that, once selected into mediation, the mediator’s effectiveness is independent of the degree of mediator bias. The key force of our results is that a biased mediator’s optimal recommendation strategies allocate more shares of resource to the favored party while providing a higher chance of a peaceful settlement to the disfavored party. |
| Keywords: | Biased Mediation, Conflict, Mechanism Design, Mediator Selection. |
| JEL: | C72 D74 D82 F51 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2024rwp-230 |
| By: | Michael Finus (University of Graz, Austria); Francesco Furini (University of Hamburg, Germany); Anna Viktoria Rohrer (University of Graz, Austria) |
| Abstract: | A commonly reported result in the literature on international environmental agreements (IEAs) is that if coalition members act as Stackelberg leaders (Stackelberg scenario) this leads to larger stable coalitions than if signatories act simultaneously with non-signatories. (Nash-Cournot scenario). This result has been taken for granted, a kind of Folk-theorem, even though it has been proven at best for specific payoff functions, and very often the conclusion is only based on simulations. We prove the Stackelberg vs. Nash-Cournot Folk-theorem based on a generic payoff function for a public good provision game. |
| Keywords: | International environmental agreements, Stability, Stackelberg vs. Nash-Cournot Folk-theorem. |
| JEL: | C72 D62 H41 |
| Date: | 2024–01 |
| URL: | https://d.repec.org/n?u=RePEc:grz:wpaper:2024-02 |
| By: | Narumi Teshima (Graduate School of Economics, Keio University and Junior Research Fellow, Research Institute for Economics & Business Administration (RIEB), Kobe University, JAPAN) |
| Abstract: | This paper analyzes the delegation of binary decisions to a committee of homogeneous agents. The principal determines the committee size and a reward scheme contingent on the revealed state and the committee's choice. Agents can acquire private information at a cost but lack intrinsic motives to make correct decisions. The main results are as follows: For any committee size and any prior distribution of the state, the reward scheme that minimizes the cost of making agents acquire information induces the committee to make decisions by majority rule. If the principal is ex-ante indifferent between the two alternatives, the optimal reward scheme for the principal induces the committee to use the majority rule and the optimal committee size is inversely U-shaped regarding information quality. |
| Keywords: | Moral hazard; Free-rider problem; Majority rule; Committee size; Information acquisition; Monetary transfers |
| JEL: | D71 D82 D86 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2024-25 |
| By: | Afridi, Farzana (Indian Statistical Institute); Barnwal, Prabhat (Michigan State University); Sarkar, Shreya (University of California) |
| Abstract: | We study the role of the administrative design of energy subsidy programs aimed at encouraging households' transition to cleaner energy sources. Our context is the universal subsidy for clean cooking gas (LPG) in India - households first purchase LPG at the market price (over-the-counter) and then receive a 'cash-back' subsidy in their bank account. The subsidy varies with the market price such that the effective price (out-of-pocket price net of subsidy) for households does not change. Using exogenous variation in the LPG market price, which varies in tandem with the international price, and administrative data on LPG purchases by one million households, we find that a 1% increase in over-the-counter LPG price causes a 1.4% decrease in LPG purchase by low-income households, even when the effective price remains unchanged. Household survey data show that low-income households substitute away from LPG towards polluting biomass-based solid fuels by 5% in response to a 1% increase in the LPG market price. Consequently, we estimate that the 'cash-back' subsidy design may worsen neonatal mortality and other relevant health outcomes. The adverse impact of the program design on clean fuel usage weakens when households have more cash on hand, suggesting households' short-term liquidity constraint is the key explanation. Our results, thus, show that the design of energy subsidy programs, in particular the timing of transfers, may have significant implications for the energy transition of liquidity-constrained households. |
| Keywords: | subsidy, liquidity constraints, cash transfer, solid fuels, LPG |
| JEL: | H26 O17 I38 |
| Date: | 2024–06 |
| URL: | https://d.repec.org/n?u=RePEc:iza:izadps:dp17104 |
| By: | Erik Madsen; Eran Shmaya |
| Abstract: | We design mechanisms for maintaining public goods which require periodic non-monetary contributions. Utilitarian welfare is maximized by concentrating contributions among low-cost group members, but such policies generally induce some members to leave the group or misreport their preferences. To forestall exit, contributions must be shifted from members with intermediate costs to some high-cost members. To deter misreporting, members must be screened using up to two membership tiers, which reward larger contributions with increased access to the good. We apply our results to the design of platforms such as Netflix and TikTok hosting crowd-sourced recommendation engines, which function as public goods supported by user feedback about new content. |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2407.05196 |
| By: | Jason Allen; Ali Hortaçsu; Eric Richert; Milena Wittwer |
| Abstract: | Many financial markets are populated by dealers, who commit to participate regularly in the market, and non-dealers, who do not commit. This market structure introduces a trade-off between competition and volatility, which we study using data on Canadian treasury auctions. We document a consistent exit trend by dealers and increasing, but irregular, participation by non-dealer hedge funds. Using a structural model, we evaluate the impact of dealer exit on hedge fund participation and its consequences for market competition and volatility. We find that hedge fund entry was partially driven by dealer exit, and that gains thanks to stronger competition associated with hedge fund entry are offset by losses due to the irregular market participation of hedge funds. We propose an issuance policy that stabilizes hedge fund participation at a sufficiently high average level and achieves revenue gains. |
| Keywords: | Debt management; Financial markets; Financial institutions; Market structure and pricing |
| JEL: | D44 D47 G12 G28 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocawp:24-29 |
| By: | Alex Gershkov (Department of Economics and the Federmann Center for the Study of Rationality, The Hebrew University of Jerusalem & University of Surrey); Benny Moldovanu (Department of Economics, University of Bonn); Philipp Strack (Department of Economics, Yale University); Mengxi Zhang (Department of Economics, University of Bonn) |
| Abstract: | We use the tools of mechanism design, combined with the theory of risk measures, to analyze a model where a cash constrained owner of an asset with stochastic returns raises capital from a population of investors that differ in their risk aversion and budget constraints. The distribution of the asset's cash flow is assumed here to be common-knowledge: no agent has private information about it. The issuer partitions and sells the asset's cash flow into several asset-backed securities, one for each type of investor. The optimal partition conforms to the commonly observed practice of tranching (e.g., senior debt, junior debt and equity) where senior claims are paid before the subordinate ones. The holders of more senior/junior tranches are determined by the relative risk appetites of the different types of investors and of the issuer, with the more risk-averse agents holding the more senior tranches. Tranching endogenously arises here in an optimal mechanism because of simple economic forces: the differences in risk appetites among agents, and in the budget constraints they face. |
| Keywords: | Security Design, Risk Aversion, Tranching, Pooling |
| JEL: | D82 G00 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:ajk:ajkdps:325 |
| By: | Guillaume Bataille (AMSE); Benteng Zou (Departement of Economics and Management, University of Luxembourg) |
| Abstract: | Motivated by recent examples, this study proposes a dynamic multistage optimal control problem to explain the instability of International Fishery Agreements (IFAs). We model two heterogeneous countries that exploit shared fishery resources, and investigate the conditions that lead to a shift from cooperation to competition. We assume that countries differ in their time preferences, initially behave as if the coalition will last indefinitely, use fixed sharing rules during cooperation, and adopt Markovian strategies after withdrawal. Our findings reveal that, for any sharing rule, coalitions of heterogeneous players always break down in finite time. We use the dynamic Shapley Value to decompose the coalition’s aggregate worth over time, thereby eliminating the incentive to leave the agreement. Additionally, we show that a fishing moratorium policy accelerates the recovery of near-extinct fish stocks; however, fishing should resume under a cooperative regime once sustainable levels are achieved. |
| Keywords: | fisheries, International Fishery Agreements, Dynamic games, Multistage Optimal Control. |
| JEL: | C71 C72 Q22 |
| Date: | 2024–07 |
| URL: | https://d.repec.org/n?u=RePEc:aim:wpaimx:2421 |
| By: | Duradi, Ali; Weigt, Hannes (University of Basel) |
| Abstract: | The electricity sector plays a key role in achieving zero-emission targets. The required transition will lead to substantial changes in the supply, demand, and distribution of electricity but also in stakeholder roles. Future market designs may change substantially to accommodate these changes, address challenges, and take advantage of new opportunities. This paper reviews the characteristics of future carbon-neutral electricity systems and electricity market design options. To provide a guiding framework for the literature review, we transfer the complexity of electricity systems into a three-layer structure: firstly, we analyze the papers that rely on techno-economic modeling of the physical electricity system. As a case study, we analyze various studies focusing on a decarbonized European electricity system in 2050. Secondly, we review papers that investigates the economic behavior and effects of self interest-seeking stakeholderssuch as producers, network operators, and consumers. Finally, we review papers focusing on policy and market design questions that guide policymakers to achieve a target physical asset combination while considering the behavior of stakeholders. We highlight common trends and disagreements in the literature, review the main drivers of future markets, and finally provide a mapping between those drivers, challenges, and opportunities. The review concludes that the most promising next step toward a fully comprehensive assessment approach is to combine the existing approaches across topical and disciplinary boundaries. |
| JEL: | L94 Q4 |
| Date: | 2024–06–30 |
| URL: | https://d.repec.org/n?u=RePEc:bsl:wpaper:2024/06 |
| By: | Falk Bräuning; Hillary Stein |
| Abstract: | Using confidential microdata, we show that shocks to primary dealers’ risk-bearing constraints have significant effects on the US Treasury securities market. In response to tighter constraints, dealers reduce their Treasury positions, triggering a reduction in aggregate turnover and an increase in bid–ask spreads. These effects are more pronounced in securities that contribute more to the utilization of risk constraints. The impaired intermediation also affects Treasury yields, amplifying the yield response to net demand shifts. Moreover, tighter dealer constraints weaken Treasury auction outcomes: Bid-to-cover ratios decline, driven by dealers’ less aggressive bidding, and the highest yield accepted by participants rises, thereby increasing the government’s cost of issuing debt. Using our estimates, we back out key elasticities to show that the shadow cost of dealer constraints is as high as one-third of dealers’ intermediation margin. |
| Keywords: | Treasury market; primary dealers; intermediation; risk constraints |
| JEL: | G10 G12 G18 G21 |
| Date: | 2024–07–01 |
| URL: | https://d.repec.org/n?u=RePEc:fip:fedbwp:98561 |