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on Economic Design |
| By: | Atila Abdulkadiroglu; Parag A. Pathak; Christopher R. Walters |
| Abstract: | We examine two approaches to improving urban school systems: changing who gets to go to existing schools (reallocation) and restructuring school portfolios through closures and reconstitution (resource augmentation). Using data from New York City high schools, we estimate models of school effects allowing for both vertical school quality differences and horizontal student-specific match effects. While sophisticated reallocation policies that optimize student-school matches can generate modest educational gains, they are constrained by limited seats at highly effective schools. Simple resource-augmentation policies targeting replacement of low-performing schools achieve comparable improvements with less systemic disruption. Analysis of NYC's school closures reveals that basic graduation rate metrics effectively identify struggling schools, suggesting complex value-added models may be unnecessary for targeting closure decisions. Our findings indicate that capacity constraints, rather than poor school matching, primarily drive educational inequality. |
| JEL: | I21 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34936 |
| By: | Prummer, Anja; Nava, Francesco |
| Abstract: | We study a principal who allocates a good to agents with private, independently distributed values through an optimal mechanism. The principal can strategically shape these value distributions by modifying the good's features, which affect agents' valuations. Our analysis reveals that optimal designs are frequently divisive - creating goods that appeal strongly to specific agents or agent types while being less valued by others. These divisive designs reduce information rents and increase total surplus, even though they reduce competition. Even when total surplus is constrained, some divisiveness in designs remains optimal. |
| Keywords: | Value Design, Mechanism Design, Differentiation |
| JEL: | D82 D46 L15 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:fubsbe:338079 |
| By: | Mauleon, Ana (Université catholique de Louvain, LIDAM/CORE, Belgium); Vannetelbosch, Vincent (Université catholique de Louvain, LIDAM/CORE, Belgium) |
| Abstract: | We consider priority-based school choice problems where students can form two types of matches: public matches observed by everyone and private matches generally not observed by others. We introduce the notion of rationalizable conjectural stable (RCS) matching, which generalizes Gale and Shapley (1962)’s stability notion to accommodate private matches. We partially characterize RCS matchings and we show that the Efficiency-Adjusted Deferred Acceptance (EADA) matching is RCS when private and public matches are perfect substitutes. Finally, we extend the definition of RCS matching to school choice problems when private and public matches are imperfect substitutes. |
| Keywords: | School choice ; Private information ; Private matchings ; Stability ; Rationalizability |
| JEL: | C70 C78 D82 |
| Date: | 2025–03–20 |
| URL: | https://d.repec.org/n?u=RePEc:cor:louvco:2025007 |
| By: | Luca Di Corato (Department of Economics, Ca’ Foscari University of Venice); Michele Moretto (Department of Economics and Management, University of Padova) |
| Abstract: | This paper studies a continuous-time regulatory problem in which a firm holds persistent private information about demand and is subject to a flow limited-liability constraint. The regulator regulates prices through a dynamic mechanism that ensures truthful reporting of the evolving type. Limited liability imposes a state-dependent lower bound on the firm’s instantaneous utility, inducing a reflecting boundary in continuation utility and giving rise to a tractable singular-control representation. We derive closed-form expressions for the optimal pricing rule and the associated continuation-utility function, and we characterize the optimal up-front transfer required to induce truthful revelation of the firm’s initial type. The resulting contract is fully explicit and highlights how limited liability shapes information rents and regulatory distortions over time. |
| Keywords: | Dynamic regulation, Limited liability, Adverse selection, Continuous-time contracting, Reflecting boundary, Singular control |
| JEL: | D82 D86 L51 H54 C61 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:fem:femwpa:2026.09 |
| By: | Jesse Rothstein; Ini Umosen; Christopher R. Walters |
| Abstract: | We study the prospects for changes in school priorities to reduce income segregation in a context of centralized school assignment, accounting for behavioral responses to school offers. Promoting integration is a central objective for large urban school districts in the US, and reforms to school assignment priorities are a prominent means of pursuing this goal. Such efforts may be constrained by students' decisions to exit the public school system in response to less-preferred school offers. Using data on kindergarten applicants to the Oakland Unified School District (OUSD), we show that offers of spots at first-choice schools boost the likelihood that applicants remain in OUSD. Nevertheless, simulations show that policy reforms giving priority for low-income students at high-income schools can substantially reduce segregation with minimal impacts on retention in the district. |
| JEL: | I21 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:34957 |
| By: | Jin Yeub Kim (Yonsei University); Wooyoung Lim (The Hong Kong University of Science and Technology) |
| Abstract: | Mediation is a key strategic instrument for managing conflicts in bargaining scenarios with incomplete information. This paper reports the first systematic laboratory investigation into the informed principal problem concerning mediator selection. The theory of neutral optimum predicts that, in our environment, the informed principal's most reasonable choice is not the mediator that maximizes the ex-ante probability of peace; rather, the one preferred by the stronger type alone constitutes a credibly justifiable compromise between the conflicting interests of different types. We find that subjects do not choose the neutral mediator more often than the peace-maximizing one. Different principal types recognize the need for inscrutable selection and form intertype compromises, and they systematically view the peace-maximizing mediator as the more compelling compromise. The strategic reasoning underlying the neutral optimum fails to materialize in the lab. |
| Keywords: | Informed Principal Problems, Mechanism Selection, Mediation, Inscrutability, Neutral Optimum, Laboratory Experiments |
| JEL: | C72 C91 D82 |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:yon:wpaper:2026rwp-283 |
| By: | Conte, Anna; D'Ippoliti, Carlo; Temperini, Jacopo |
| Abstract: | Consensus mechanisms are institutional governance structures that coordinate decentralized agents by aligning incentives to sustain agreement on shared outcomes. Many contemporary designs embed efficiency-reducing contingencies, such as reduced rewards or penalties, intended to discipline behaviour after coordination failure. The implicit assumption is that efficiency loss strengthens incentives to restore agreement. We test this assumption in a controlled agreement environment derived from a consensus-like structure. In a two-stage mechanism where coordination failure reduces available surplus but agreement remains individually rational, laboratory data from 716 participants reveal persistent disagreement in reduced-surplus states. Conflict rates range from approximately 20% to over 60%, contradicting standard equilibrium predictions of universal agreement. These results show that efficiency loss does not necessarily discipline behaviour. Instead, reduced-surplus environments are associated with sustained disagreement and amplified inefficiency, highlighting the importance of incorporating behavioural considerations into the design of consensus-based governance systems. |
| Date: | 2026–03–03 |
| URL: | https://d.repec.org/n?u=RePEc:osf:socarx:8b6kf_v1 |
| By: | Harrison Katz |
| Abstract: | Tourism demand forecasting is methodologically mature, but it typically treats accommodation supply as fixed or exogenous. In platform-mediated short-term rentals, supply is elastic, decision-driven, and co-evolves with demand through pricing, information design, and interventions. I reframe the core issue as endogenous stock-out censoring: realized booked nights satisfy B_{k, t} |
| Date: | 2026–02 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.00422 |
| By: | Alexander Erlei; Lukas Meub |
| Abstract: | As AI agents increasingly act on behalf of human stakeholders in economic settings, understanding their behavior in complex market environments becomes critical. This article examines how Large Language Models coordinate on markets that are characterized by information asymmetries and in which providers of services have incentives to exploit that asymmetry for their own economic gain. To that end, we conduct simulations with GPT-5.1 agents in credence goods markets, manipulating the institutional framework (free market, verifiability, liability), LLM agent's social preferences (default, self-interested, inequity-averse, efficiency-loving), and reputation mechanisms across one-shot and repeated 16-round interactions. In one-shot settings, LLM agents largely fail to establish cooperation, with markets breaking down except under liability rules or when experts have efficiency-loving preferences. Repeated interactions solve consumer participation through competitive price reduction, but expert fraud remains entrenched absent explicit other-regarding preferences. LLM consumers focus narrowly on price levels rather than understanding strategic incentives embedded in markups, making them vulnerable to exploitation. Compared to human experiments, LLM markets exhibit substantially higher consumer participation but much greater market concentration, lower prices, and more polarized fraud patterns. The effect of institutions like verifiability and reputation is also much more ambiguous. Surplus shifts dramatically toward consumers under social-preference objectives. These findings suggest that institutional design for AI agent markets requires fundamentally different approaches than those effective for human actors, with social preference alignment emerging as the primary determinant of market efficiency. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.08853 |
| By: | Yang Cai; Vineet Gupta; Zun Li; Aranyak Mehta |
| Abstract: | The celebrated Myerson--Satterthwaite theorem shows that in bilateral trade, no mechanism can be simultaneously fully efficient, Bayesian incentive compatible (BIC), and budget balanced (BB). This naturally raises the question of how closely the gains from trade (GFT) achievable by a BIC and BB mechanism can approximate the first-best (fully efficient) benchmark. The optimal BIC and BB mechanism is typically complex and highly distribution-dependent, making it difficult to characterize directly. Consequently, much of the literature analyzes simpler mechanisms such as the Random-Offerer (RO) mechanism and establishes constant-factor guarantees relative to the first-best GFT. An important open question concerns the worst-case performance of the RO mechanism relative to first-best (FB) efficiency. While it was originally hypothesized that the approximation ratio $\frac{\text{GFT}_{\text{FB}}}{\text{GFT}_{\text{RO}}}$ is bounded by $2$, recent work provided counterexamples to this conjecture: Cai et al. proved that the ratio can be strictly larger than $2$, and Babaioff et al. exhibited an explicit example with ratio approximately $2.02$. In this work, we employ AlphaEvolve, an AI-guided evolutionary search framework, to explore the space of value distributions. We identify a new worst-case instance that yields an improved lower bound of $\frac{\text{GFT}_{\text{FB}}}{\text{GFT}_{\text{RO}}} \ge \textbf{2.0749}$. This establishes a new lower bound on the worst-case performance of the Random-Offerer mechanism, demonstrating a wider efficiency gap than previously known. |
| Date: | 2026–03 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2603.08679 |
| By: | Bourlès, Renaud; Laurent-Lucchetti, Jérémy; Rochet, Jean-Charles |
| Abstract: | More than a decade after COP21, carbon emission trajectories remain far above the 1.5° C threshold, due to lack of international consensus. Departing from cost-benefit approaches, we assess the maximum reduction in carbon emissions that could be accepted by all countries. We characterize the target-consistent mechanism that minimizes global emissions subject to the participation constraint of each country. The mechanism can be implemented either via a uniform carbon tax or as a cap-and-trade system. Calibrated to data from 69 countries, including GDP, carbon intensities, and observed tax rates, our model suggests — for our baseline scenario — that the maximum uniform carbon price politically acceptable for all countries is $250 per ton. It could reduce global emissions by 35%, but would require unprecedented international transfers: up to 3% of world GDP, with a large redistribution from high-income, low-emission countries to carbon-intensive emerging economies. Our analysis highlights the structural ambition gap imposed by voluntary cooperation and identifies two levers to overcome it: convergence in green technologies and stronger political support for mitigation. Without progress in these dimensions, international climate policy remains constrained to deliver only modest results. |
| Date: | 2026–03–12 |
| URL: | https://d.repec.org/n?u=RePEc:tse:wpaper:131528 |
| By: | Wei Liang (China Economics and Management Academy, Central University of Finance and Economics, Beijing, 100081, China); Heng-fu Zou (The World Bank, Washington, D. C., 20433, USA) |
| Abstract: | We develop a continuous-time principal-agent model with mean-field interactions to study optimal incentive design in large economies. We extend Sannikov's recursive contracting framework to a setting where a single principal manages a continuum of heterogeneous agents whose behaviors are interdependent through aggregate effort externalities. Each agent's hidden efort affects their stochastic output, while the principal designs state-contingent contracts that must account for both individual moral hazard and collective behavior effects. The model generates a coupled system of forward-backward stochastic differential equations: a backward Hamilton-Jacobi-Bellman equation characterizing the principal's value function and optimal contracts, and a forward Fokker-Planck equation governing the evolution of the agent distribution. We establish conditions for mean-field equilibrium where the aggregate effort assumed by the principal when designing contracts coincides with the aggregate effort induced by agents following these contracts. Our numerical implementation reveals that despite complex state-dependent individual con tracts, the aggregate effort remains approximately stable over the contract horizon, while the distribution of continuation values exhibits increasing dis persion. Applications include compensation design in large frms, platform economies, and public incentive programs where individual actions generate aggregate externalities. |
| Keywords: | Mean field games, Principal-agent problem, Continuous-time contracting, Moral hazard, Fokker-Planck equation, Dynamic incentives |
| JEL: | C63 C73 D86 G32 J33 |
| Date: | 2026–03–15 |
| URL: | https://d.repec.org/n?u=RePEc:cuf:wpaper:806 |