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on Economic Design |
| By: | Paweł Doligalski; Piotr Dworczak; Mohammad Akbarpour; Scott Duke Kominers* |
| Abstract: | Policymakers often distort goods markets to effect redistribution—for example, via price controls, differential taxation, or in-kind transfers. We investigate the optimality of such policies alongside the (optimally-designed) income tax. In our framework, agents differ in both their ability to generate income and their consumption preferences, and a planner maximizes a social welfare function subject to incentive and resource constraints. We uncover a generalization of the Atkinson-Stiglitz theorem by showing that goods markets should be undistorted if the heterogeneous consumption tastes (i) do not affect the marginal utility of disposable income, (ii) do not enter into the social welfare weights and (iii) are statistically independent of ability. We also show, however, that market interventions play a role in the optimal resolution of the equity-efficiency trade-off if any of the three assumptions is relaxed. In a special case of our model with linear utilities, binary ability, and continuous willingness to pay for a single good, we characterize the globally optimal mechanism and show that it may feature meanstested consumption subsidies, in-kind transfers, and differential commodity taxation |
| Date: | 2025–04–02 |
| URL: | https://d.repec.org/n?u=RePEc:bri:uobdis:25/787 |
| By: | Halil I. Bayrak; Martin Bichler |
| Abstract: | Mechanism design with inspection has received increasing attention due to its applications in the field. For example, large warehouses have started to auction scarce capacity. This capacity shall be allocated in a way that maximizes the seller's revenue. In such mechanism design problems, the seller can inspect the true value of a buyer and his realized sales in the next period without cost. Prior work on mechanism design with deferred inspection is based on the assumption of a common prior distribution. We design a mechanism with a deferred inspection that is (distributionally) robustly optimal either when the ambiguity-averse mechanism designer wants to maximize her worst-case expected payoff or when she wants to minimize her worst-case expected regret. It is a relatively simple mechanism with a concave allocation and linear payment rules. We also propose another robustly optimal mechanism that has the same concave allocation function but extracts the maximal payment from all the types of the agent, which can have a strictly higher expected payoff under non-worst-case distributions compared to the robustly optimal mechanism with the linear payment rule. We show that multi-bidder monotonous mechanisms might not exist. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.04767 |
| By: | Yuri Faenza; Aapeli Vuorinen |
| Abstract: | Many centralized mechanisms for two-sided matching markets that enjoy strong theoretical properties assume that the planner solicits full information on the preferences of each participating agent. In particular, they expect that participants compile and communicate their complete preference lists over agents from the other side of the market. However, real-world markets are often very large and agents cannot always be expected to even produce a ranking of all options on the other side. It is therefore important to understand the impact of incomplete or truncated lists on the quality of the resultant matching. In this paper, we focus on the Serial Dictatorship mechanism in a model where each agent of the proposing side (students) has a random preference list of length $d$, sampled independently and uniformly at random from $n$ schools, each of which has one seat. Our main result shows that if the students primarily care about being matched to any school of their list (as opposed to ending up unmatched), then all students in position $i\leq n$ will prefer markets with longer lists, when $n$ is large enough. Schools on the other hand will always prefer longer lists in our model. We moreover investigate the impact of $d$ on the rank of the school that a student gets matched to. Our main result suggests that markets that are well-approximated by our hypothesis and where the demand of schools does not exceed supply should be designed with preference lists as long as reasonable, since longer lists would favor all agents. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.06217 |
| By: | Soumen Banerjee; Yi-Chun Chen; Yifei Sun |
| Abstract: | Implementation theory has made significant advances in characterizing which social choice functions can be implemented in Nash equilibrium, but these results typically assume sophisticated strategic reasoning by agents. However, evidence exists to show that agents frequently cannot perform such reasoning. In this paper, we present a finite mechanism which fully implements Maskin-monotonic social choice functions as the outcome of the unique correlated equilibrium of the induced game. Due to the results in Hart and MasColell (2000), this yields that even when agents use a simple adaptive heuristic like regret minimization rather than computing equilibrium strategies, the designer can expect to implement the SCF correctly. We demonstrate the mechanism's effectiveness through simulations in a bilateral trade environment, where agents using regret matching converge to the desired outcomes despite having no knowledge of others' preferences or the equilibrium structure. The mechanism does not use integer games or modulo games. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.03528 |
| By: | Echenique, Federico; Robinson‐Cortés, Alejandro; Yariv, Leeat |
| Abstract: | We present an experimental study of decentralized two‐sided matching markets with no transfers. Experimental participants are informed of everyone's preferences and can make arbitrary nonbinding match offers that get finalized when a period of market inactivity has elapsed. Several insights emerge. First, stable outcomes are prevalent. Second, while centralized clearinghouses commonly aim at implementing extremal stable matchings, our decentralized markets most frequently culminate in the median stable matching. Third, preferences' cardinal representations impact the stable partners with whom participants match. Last, the dynamics underlying our results exhibit strategic sophistication, with agents successfully avoiding cycles of blocking pairs. |
| Keywords: | Economics, Applied Economics, Economic Theory, Decentralized matching, experiments, market design, C78, C92, D47, Econometrics, Applied economics |
| Date: | 2025–01–01 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:econwp:qt14z7517n |
| By: | Xiaotie Deng; Ningyuan Li; Weian Li; Qi Qi |
| Abstract: | This paper investigates a two-stage game-theoretical model with multiple parallel rank-order contests. In this model, each contest designer sets up a contest and determines the prize structure within a fixed budget in the first stage. Contestants choose which contest to participate in and exert costly effort to compete against other participants in the second stage. First, we fully characterize the symmetric Bayesian Nash equilibrium in the subgame of contestants, accounting for both contest selection and effort exertion, under any given prize structures. Notably, we find that, regardless of whether contestants know the number of participants in their chosen contest, the equilibrium remains unchanged in expectation. Next, we analyze the designers' strategies under two types of objective functions based on effort and participation, respectively. For a broad range of effort-based objectives, we demonstrate that the winner-takes-all prize structure-optimal in the single-contest setting-remains a dominant strategy for all designers. For the participation objective, which maximizes the number of participants surpassing a skill threshold, we show that the optimal prize structure is always a simple contest. Furthermore, the equilibrium among designers is computationally tractable when they share a common threshold. |
| Date: | 2025–05 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2505.08342 |
| By: | Pollitt, M. G.; Mitchell, R.; Duma, D.; Covatariu, A. |
| Abstract: | The connection queue in Great Britain (GB) is recognized as a major challenge for transmission and distribution networks and for the energy transition. The queue reached 726 GW in July 2024 for generation and storage, but it is also significant on the demand side. The drivers of this problem have been identified by the government, the regulator and the industry. One of the drivers is the inability of the First Come First Served (FCFS) rule – the de facto system of allocation – to account for the feasibility, progress and value of the different projects applying for connection. This paper explores this latter aspect, by taking inspiration from the literature on auction theory, mechanism design and queuing theory. The paper discusses potential changes to the initial (primary) allocation of connection rights in light of concepts such as the beauty contest and the Knapsack problem, and to queue management by potentially introducing a secondary trading of connection rights to increase efficiency. The paper also discusses the risks and potential biases of such changes, including asymmetric information and strategic behaviour. |
| Keywords: | Distribution System Operators, Auction Theory, Queuing Theory, Grid Connection Queue |
| JEL: | D44 L94 |
| Date: | 2025–06–10 |
| URL: | https://d.repec.org/n?u=RePEc:cam:camdae:2534 |
| By: | Hadi Hosseini; Samarth Khanna; Ronak Singh |
| Abstract: | The rise of Large Language Models (LLMs) has driven progress in reasoning tasks -- from program synthesis to scientific hypothesis generation -- yet their ability to handle ranked preferences and structured algorithms in combinatorial domains remains underexplored. We study matching markets, a core framework behind applications like resource allocation and ride-sharing, which require reconciling individual ranked preferences to ensure stable outcomes. We evaluate several state-of-the-art models on a hierarchy of preference-based reasoning tasks -- ranging from stable-matching generation to instability detection, instability resolution, and fine-grained preference queries -- to systematically expose their logical and algorithmic limitations in handling ranked inputs. Surprisingly, even top-performing models with advanced reasoning struggle to resolve instability in large markets, often failing to identify blocking pairs or execute algorithms iteratively. We further show that parameter-efficient fine-tuning (LoRA) significantly improves performance in small markets, but fails to bring about a similar improvement on large instances, suggesting the need for more sophisticated strategies to improve LLMs' reasoning with larger-context inputs. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.04478 |
| By: | Echenique, Federico; Núñez, Matías |
| Abstract: | We describe a sequential mechanism that fully implements the set of efficient outcomes in environments with quasi-linear utilities. The mechanism asks agents to take turns in defining prices for each outcome, with a final player choosing an outcome for all: Price and Choose. The choice triggers a sequence of payments from each agent to the preceding agent. We present several extensions. First, payoff inequalities may be reduced by endogenizing the order of play. Second, our results extend to a model without quasi-linear utility, to a setting with an outside option, robustness to max-min behavior, and caps on prices. (JEL C72, D11, D44, D71, D82) |
| Keywords: | Economics, Applied Economics, Economic Theory, Banking, finance and investment, Applied economics, Economic theory |
| Date: | 2025–05–01 |
| URL: | https://d.repec.org/n?u=RePEc:cdl:econwp:qt5dw4g7k5 |
| By: | Michael G Pollitt; Rona Mitchell; Daniel Duma; Andrei Covatariu |
| Keywords: | Distribution System Operators, auction theory, queuing theory, grid connection queue |
| JEL: | D44 L94 |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:enp:wpaper:eprg2512 |
| By: | Hans Gersbach |
| Abstract: | This paper introduces a simple democratic procedure. In a first stage, all members of a polity decide whether to apply for proposal-making or later vote on proposals made in the second stage. This procedure is called Propose or Vote (PoV). With appropriate default points and majority voting over two randomly selected proposals, the PoV procedure can implement the Condorcet winner with only one round of voting if a Condorcet winner exists. We explore ways to establish uniqueness, alternative voting procedures over the selected alternatives, and the application to elections. In the latter case, agents can decide whether to stand for election to an office or to vote on the set of candidates. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.05998 |
| By: | Rachael Colley; David Manlove; Daniel Paulusma; Mengxiao Zhang |
| Abstract: | Kidney Exchange Programmes (KEPs) facilitate the exchange of kidneys, and larger pools of recipient-donor pairs tend to yield proportionally more transplants, leading to the proposal of international KEPs (IKEPs). However, as studied by \citet{mincu2021ip}, practical limitations must be considered in IKEPs to ensure that countries remain willing to participate. Thus, we study IKEPs with country-specific parameters, represented by a tuple $\Gamma$, restricting the selected transplants to be feasible for the countries to conduct, e.g., imposing an upper limit on the number of consecutive exchanges within a country's borders. We provide a complete complexity dichotomy for the problem of finding a feasible (according to the constraints given by $\Gamma$) cycle packing with the maximum number of transplants, for every possible $\Gamma$. We also study the potential for countries to misreport their parameters to increase their allocation. As manipulation can harm the total number of transplants, we propose a novel individually rational and incentive compatible mechanism $\mathcal{M}_{\text{order}}$. We first give a theoretical approximation ratio for $\mathcal{M}_{\text{order}}$ in terms of the number of transplants, and show that the approximation ratio of $\mathcal{M}_{\text{order}}$ is asymptotically optimal. We then use simulations which suggest that, in practice, the performance of $\mathcal{M}_{\text{order}}$ is significantly better than this worst-case ratio. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.04092 |
| By: | Leonardo Baggiani; Martin Herdegen; Leandro S\'anchez-Betancourt |
| Abstract: | Automated Market Makers (AMMs) are emerging as a popular decentralised trading platform. In this work, we determine the optimal dynamic fees in a constant function market maker. We find approximate closed-form solutions to the control problem and study the optimal fee structure. We find that there are two distinct fee regimes: one in which the AMM imposes higher fees to deter arbitrageurs, and another where fees are lowered to increase volatility and attract noise traders. Our results also show that dynamic fees that are linear in inventory and are sensitive to changes in the external price are a good approximation of the optimal fee structure and thus constitute suitable candidates when designing fees for AMMs. |
| Date: | 2025–06 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2506.02869 |