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on Economic Design |
| By: | Ortega, Josué; Arribillaga, R. Pablo |
| Abstract: | Addressing the large inefficiencies generated by the Deferred Acceptance (DA) mechanism requires priority violations, but which ones are justifiable? The leading approach is to ask individuals if they consent to waive their priority ex-ante. We develop an alternative question-free solution, in which a priority violation is justifiable whenever the affected student either (i) directly benefits from the improvement, or (ii) is unimprovable under any assignment that Pareto-dominates DA. This endogenous justifiability criterion permits improvements unattainable by the leading consent-based mechanism under any consent structure. We provide a "just below cutoffs" mechanism that always finds a strongly justifiable matching whenever DA's outcome is inefficient, and build on it to construct a polynomial-time algorithm that expands justifiable improvements iteratively, converging to a DA improvement that cannot be Pareto-improved by any justifiable matching without strictly expanding the beneficiary set. Finally, we prove theoretically that both the ex-ante consent and the endogenous justifiability frameworks have important limitations in reaching Pareto-efficient outcomes, and use simulations to quantify how binding these constraints are in practice. |
| Keywords: | school choice, consent-based mechanisms, justifiable priority violations |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:qmsrps:202604 |
| By: | Yuchen Hu; Martin J. Wainwright; Stephen Bates |
| Abstract: | We study statistical parameter estimation in the setting of data markets. A buyer seeks to estimate a parameter based on samples that can be purchased from competing providers that differ in their data quality and provision costs. When quality is known ex ante, we define a cost-per-information score that summarizes each provider's provision cost per unit of information about the buyer's estimation objective. We describe second-score procurement mechanism that ranks providers by this score, and endogenously chooses both a provider and a sample size while making truthful cost reports optimal. We then turn to the more realistic setting where data quality is private, and can only be indirectly observed via the delivered data. In this setting, we propose a simple mechanism that augments the second-score rule with a lenient ex post statistical test of the reported quality. We prove that under mild conditions, there exists an equilibrium in which sellers report costs truthfully and report quality up to deviations that vanish as the procured sample size grows. Our analysis highlights how the choice of verification test and the buyer's accuracy-cost tradeoff jointly shape participation and misreporting incentives in data markets. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.08821 |
| By: | Thomas Pitz; Vinicius Ferraz |
| Abstract: | When time-to-contract is payoff-relevant, how should a matching platform choose between a descending-clock (Dutch) mechanism and posted prices? We introduce a timing--entry--volume (TEV) framework that traces the causal chain from mechanism format through contracting speed, participation incentives, match volume, and revenue. Against immediate posted prices, dominance depends on the earnings and timing gaps and may hold for all waiting costs, only above a floor~$\lambda^*$, only below a ceiling~$\lambda^{**}$, or not at all. Against a batch-clearing benchmark, Dutch dominates through both timing and payment channels. In the two-sided extension, cross-side complementarity amplifies a one-sided advantage into equilibrium dominance on both sides, with welfare gains when match surplus is sufficiently large. All dominance conditions are stated in estimable quantities. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.10638 |
| By: | Terence Highsmith |
| Abstract: | Many matching markets feature unknown, dynamic arrivals of agents that must match immediately. A caseworker must match an abused child to a foster home, a hospital must assign a patient in critical condition to a room, or a city must place a homeless individual into a shelter. We design an online matching algorithm -- the Sequential Equilibrium Mechanism (SEM) -- that approximates large market equilibria to match arriving agents to objects. SEM is asymptotically efficient, fair, and strategy-proof with probability one. Our application plans to deploy a lab-in-the-field experiment where real caseworkers match vulnerable children to host homes, and we provide simulation evidence that SEM can substantially improve welfare. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.12181 |
| By: | Wilfried Youmbi Fotso; Xun Chen |
| Abstract: | We study Bayesian persuasion when information design is delegated to an intermediary who privately chooses the experiment subject to convex costs and would be incentivized by the principal via outcome-dependent transfers. We provide a sharp characterization of first-best implementability: implementing the first-best requires local affine alignment between the principal's and intermediary's reduced-form payoff indices on the posteriors induced by the target experiment, while a stronger global alignment condition guarantees implementability. Outside the global alignment condition, moral hazard typically prevents first-best implementation. We then characterize the second best: the principal's problem admits a virtual Bayesian persuasion representation in which the objective is distorted by a shadow cost proportional to the intermediary's valuation of posteriors. Under entropy costs, moral hazard compresses posterior dispersion relative to the first-best benchmark. In two-state environments with a binary-action receiver, the optimal second-best experiment has a tractable two-posterior form with explicit formulas for posterior endpoints and mixing weights, and the optimal transfer schedule is characterized in closed form as a triangular system in the shadow price, transfer gap, and participation constraint. A numerical example quantifies the compression: moral hazard reduces posterior spread by approximately 28 percent relative to first best under the baseline parameterization. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.10006 |
| By: | Huisheng Wang; H. Vicky Zhao |
| Abstract: | Herding, where investors imitate others' decisions rather than relying on their own analysis, is a prevalent phenomenon in financial markets. Excessive herding distorts rational decisions, amplifies volatility, and can be exploited by manipulators to harm the market. Traditional regulatory tools, such as information disclosure and transaction restrictions, are often imprecise and lack theoretical guarantees for effectiveness. This calls for a quantitative approach to regulating herding. We propose a regulator-leader-follower trilateral game framework based on optimal control theory to study the complex dynamics among them. The leader makes rational decisions, the follower maximizes utility while aligning with the leader's decisions, whereas the regulator designs a mechanism to maximize social welfare and minimize regulatory cost. We derive the follower's decisions and the regulator's mechanisms, theoretically analyze the impact of regulation on decisions, and investigate effective mechanisms to improve social welfare. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.11100 |
| By: | Yin, Xiuxia; Dietzenbacher, Bas (RS: GSBE other - not theme-related research, QE Math. Economics & Game Theory) |
| Abstract: | This paper studies the allocation of a perfectly divisible good among agents with a status quo payoff. The aggregate status quo payoff may exceed the total amount to be shared or fall short. We introduce and analyze the uniform rule which divides as equally as possible provided that either all agents lose or all agents win with respect to their status quo payoff. We provide several axiomatic characterizations based on contraction and expansion properties. On the domains of claims problems and surplus problems, our results offer some new characterizations of the constrained equal awards rule and the constrained equal welfare rule, respectively. |
| Keywords: | resource allocation, status quo, uniform rule, axiomatic analysis |
| Date: | 2026–04–09 |
| URL: | https://d.repec.org/n?u=RePEc:unm:umagsb:2026002 |
| By: | Niemann, Rainer; Rohlfing-Bastian, Anna |
| Abstract: | This paper analyzes how ESG-linked executive compensation interacts with carbon taxation in a multitask principal-agent framework. A risk-neutral principal with financial and environmental preferences incentivizes a risk-averse manager to exert productive and abatement effort while facing an exogenous carbon tax on emissions. We show that, in the absence of ESG incentives, carbon taxes reduce emissions mainly by lowering production. In contrast, ESG-linked compensation shifts emission reductions toward increased abatement, allowing the principal to raise expected payoff while simultaneously reducing emissions, both with and without carbon taxation. However, carbon taxes narrow the range of feasible ESG preferences and, at high levels, may induce excessive abatement, potentially leading to negative net emissions. Our results highlight the importance of aligning internal incentive design with external climate regulation. The interplay of ESG compensation and carbon taxes should also be considered from a regulatory perspective. |
| Keywords: | ESG-linked executive compensation, Carbon taxation, Environmental regulation, Climate policy, Managerial incentives |
| JEL: | D82 M52 Q58 Q54 H25 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:zbw:arqudp:340001 |
| By: | Panagiotis Kyriazis |
| Abstract: | Economic institutions often influence market outcomes not by directly controlling sellers' menus, but by shaping the market composition sellers face. We study this problem in the canonical monopoly screening model. An upstream actor chooses the distribution of buyer valuations, after which a monopolist offers the optimal quality-price menu. We characterize the optimal market composition and the efficient frontier of consumer surplus and profit. If the upstream actor places at least as much weight on profits as on consumer surplus, the optimal market collapses to the top type. If the weight on consumer surplus is larger than the weight on profits, the optimal market exhibits no exclusion, no interior bunching, and a positive mass at the highest valuation. Under a mild curvature condition, the optimum is unique. As the weight on consumer surplus rises, the optimal market becomes more heterogeneous and less concentrated at the top: the interior expands while the top segment shrinks. Consumer surplus rises, profit falls, and total surplus declines. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.09340 |
| By: | Kan Kuno; Daisuke Moriwaki; Yoshihiro Takenami |
| Abstract: | In centralized assignment problems, agents may have preferences over joint rather than individual assignments, such as couples in residency matching or siblings in school choice and daycare. Standard preference estimation methods typically ignore such complementarities. This paper develops an empirical framework that explicitly incorporates them. Using data from daycare assignment in a municipality in Japan, we estimate a model in which families incur both additional commuting distance and a fixed non-distance disutility when siblings are assigned to different facilities. We find that split assignment generates a large disutility, equivalent to more than twice the average commuting distance. We then simulate counterfactual assignment policies that vary the strength of sibling priority and evaluate welfare. The sibling priority reform that we designed and that was implemented in 2024 increases welfare by 6.4% while reducing inequality in assignment rates across sibling groups; models that ignore sibling complementarities substantially understate these gains. At the same time, we uncover a clear efficiency-equity tradeoff: along the frontier, increasing mean welfare by 100 meters is associated with an increase in inequality of about 1.7 percentage points, and the welfare-maximizing policy reverses much of the reform's reduction in inequality, largely through the displacement of households without siblings. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.13597 |
| By: | Abhimanyu Pallavi Sudhir; Long Tran-Thanh |
| Abstract: | One of the impediments to the efficiency of information markets is the inherent information asymmetry present in them, exacerbated by the "buyer's inspection paradox" (the buyer cannot mitigate the asymmetry by "inspecting" the information, because in doing so the buyer obtains the information without paying for it). Previous work has suggested that using Large Language Model (LLM) buyers to inspect and purchase information could overcome this information asymmetry, as an LLM buyer can simply "forget" the information it inspects. In this work, we analyze this mechanism formally through a "value-of-information" paradigm, i.e. whether it incentivizes information to be priced and provided in accordance with its "true value". We focus in particular on our new recursive version of the mechanism, which we believe has a range of applications including in AI alignment research, where it is related to Extrapolated Volition and Scalable Oversight. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.08606 |
| By: | Thomas H\"ubner |
| Abstract: | Electricity is typically traded in day-ahead auctions because many power system decisions, such as unit commitment, must be made in advance. However, when wind and solar generators sell power one day ahead, they face uncertainty about their actual production. In current day-ahead auctions, this uncertainty cannot be directly communicated, leading to inefficient use of renewable energy and suboptimal system decisions. We show how this problem can be addressed using the concept of equilibrium under uncertainty from microeconomic theory. In particular, we demonstrate that electricity contracts should be conditioned not only on the time and location of delivery, but also on the state of the world (e.g., whether it will be windy or calm). This requires a precise definition of the state of the world. Since there are infinitely many possible definitions, criteria are needed to select among them. We develop such criteria and show that the resulting states correspond to solutions of an optimal partitioning problem. Finally, we illustrate how these states can be computed and interpreted using a case study of offshore wind farms in the European North Sea. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.13603 |
| By: | Sebastiano Della Lena; Alessio Muscillo; Paolo Pin |
| Abstract: | Consumers discover their preferences through experience, yet the sequence and composition of those experiences are often designed by firms, digital platforms, or policymakers. We introduce a ``data-design'' framework for preference discovery, in which the structure of consumption data shapes learning. Bundling generates correlated exposure across goods, so utility surprises propagate through the co-consumption network. When estimation errors are known, bias-targeted design can shut down learning and amplify misperceptions. Conversely, robust design uses only the geometry of past co-consumption: popularity-biased bundles slow learning, while correlation-breaking bundles accelerate preference discovery. The framework thus explains how dominant platforms can sustain biased demand through exposure design, and why effective regulation may need to intervene on the structure of exposure itself rather than only on prices or market shares. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.14260 |
| By: | Felix J. Bierbrauer; Pierre C. Boyer; Andreas Peichl; Daniel Weishaar; Felix Bierbrauer |
| Abstract: | The key question in multi-dimensional screening problems is how prices, incentives, or marginal tax rates in one economic activity should vary with other activities. We develop a theory of tax reforms in a setting with multidimensional heterogeneity amongst agents who take two economic decisions. Our leading application is the taxation of couples who choose an earnings level for each spouse. In our theoretical analysis, we characterize the conditions under which reforms of a given tax system yield Pareto- or welfare improvements. In an empirical application to the US, we quantify the welfare implications of such reforms. We also prove an impossibility result: under assumptions common in the tax perturbation literature, the hypothesis that the given status quo tax is optimal leads to a contradiction. Thus, the perturbation approach cannot be used to characterize a fully optimal tax system. |
| Keywords: | tax reforms, multi-dimensional screening, taxation of couples, optimal taxation |
| JEL: | C72 D72 D82 H21 |
| Date: | 2026 |
| URL: | https://d.repec.org/n?u=RePEc:ces:ceswps:_12601 |
| By: | Sebastian Galiani; Raul A. Sosa |
| Abstract: | Being around babies makes people want babies. We formalize this observation as the empathy channel: exposure to infants in the social environment activates neurobiological mechanisms that increase the desire for parenthood. As children become scarcer, this affective stimulus weakens, further eroding the motivation to have children. We embed the mechanism in a two-group overlapping-generations quantity-quality model. The empathy channel generates a positive externality, since each birth raises others’ desire for children, making the decentralized equilibrium inefficient. We characterize the optimal per-child subsidy and show that the first-order Pigouvian rate substantially overshoots the general-equilibrium optimum. The optimal targeting rule follows a Ramsey-like logic, directing the subsidy at the group with the most externality per fiscal dollar, not the group with the largest externality per child. The calibrated model suggests that the empathy channel can account for 3–33% of the fertility decline, with 13.4% at the baseline. At this baseline, the Pigouvian overshoot is 23–32% and the optimal subsidy raises welfare by 0.22% in consumption-equivalent terms. |
| JEL: | J13 |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:nbr:nberwo:35021 |
| By: | Shuze Daniel Liu; Claire Chen; Jiabao Sean Xiao; Lei Lei; Yuheng Zhang; Yisong Yue; David Simchi-Levi |
| Abstract: | The recent advancement of Large Language Models (LLMs) has established their potential as autonomous interactive agents. However, they often struggle in strategic games of incomplete information, such as bilateral price negotiation. In this paper, we investigate if Reinforcement Learning from Verifiable Rewards (RLVR) can effectively teach LLMs to negotiate. Specifically, we explore the strategic behaviors that emerge during the learning process. We introduce a framework that trains a mid-sized buyer agent against a regulated LLM seller across a wide distribution of real-world products. By grounding reward signals directly in the maximization of economic surplus and strict adherence to private budget constraints, we reveal a novel four-phase strategic evolution. The agent progresses from naive bargaining to using aggressive starting prices, moves through a phase of deadlock, and ultimately develops sophisticated persuasive skills. Our results demonstrate that this verifiable training allows a 30B agent to significantly outperform frontier models over ten times its size in extracting surplus. Furthermore, the trained agent generalizes robustly to stronger counterparties unseen during training and remains effective even when facing hostile, adversarial seller personas. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.09855 |
| By: | Panagiotis Kyriazis; Edmund Lou |
| Abstract: | We investigate the relationship between product offerings, information dissemination, and consumer decision-making in a monopolistic screening environment in which consumers lack information about their valuation of quality-differentiated products. An intermediary, who is driven by the objective of maximizing consumer surplus but is also biased towards high-quality products, provides recommendations after the monopolist announces the menu of product choices. We characterize the monopolist's profit-maximizing finite-item menu. Our results show that as intermediaries place greater emphasis on consumer surplus over product quality, sellers are prompted to strategically expand their product range. Intriguingly, this augmented product variety decreases economic efficiency compared to scenarios where direct seller-to-consumer information provision is the norm. The role of information intermediaries proves pivotal in shaping consumer welfare, market profitability, and overarching economic efficiency. Our insights underscore the complexities introduced by these intermediaries that policymakers and market designers must consider when designing policies centered on consumer learning and market information transparency. |
| Date: | 2026–04 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2604.09343 |