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on Economic Design |
| By: | Onuchic, Paula; Ray, Debraj |
| Abstract: | A sender sells an object of unknown quality to a receiver who pays his expected value for it. Sender and receiver might hold different priors over quality. The sender commits to a monotone categorization of quality. We characterize the sender's optimal monotone categorization, the optimality of full pooling or full separation, and make precise a sense in which pooling is dominant relative to separation. As an application, we study the design of a grading scheme by an educational institution that seeks to signal student qualities and simultaneously incentivize students to learn. We show how these incentive constraints are embedded as a distortion of the school's prior over student qualities, generating a monotone categorization problem with distinct sender and receiver priors. |
| Keywords: | D82; D83; heterogeneous priors; information design; Monotonic categorization |
| JEL: | J1 |
| Date: | 2023–11–30 |
| URL: | https://d.repec.org/n?u=RePEc:ehl:lserod:125653 |
| By: | Muhammed Ceesay; Nicola Doni; Domenico Menicucci |
| Abstract: | We examine a two-bidder auction setting in which the distributions for the bidders’ valuations are asymmetric over a support consisting of three elements. For the first price auction we derive the unique Bayes Nash Equilibrium in closed form, which allows to obtain more precise results with respect to the classical results in the literature on how asymmetries affect equilibrium bidding. Then we compare the revenue in the first price auction with the revenue in the second price auction. The latter is often superior to the former and we determine precisely, given a distribution for the value of the weak bidder, when a distribution for the value of the strong bidder exists such that the first price auction is superior to the second auction. For two particular asymmetries, shift and stretch, we show that in our setting the results are quite different from the results which are well-known in the literature. |
| Keywords: | Asymmetric auctions, First price auction, Second price auction, Revenue ranking |
| JEL: | D44 D82 |
| Date: | 2024 |
| URL: | https://d.repec.org/n?u=RePEc:frz:wpaper:wp2024_20.rdf |
| By: | Jose Correa; Andres Cristi; Laura Vargas Koch |
| Abstract: | A fundamental economic question is that of designing revenue-maximizing mechanisms in dynamic environments. This paper considers a simple yet compelling market model to tackle this question, where forward-looking buyers arrive at the market over discrete time periods, and a monopolistic seller is endowed with a limited supply of a single good. In the case of i.i.d. and regular valuations for the buyers, Board and Skrzypacz (2016) characterized the optimal mechanism and proved the optimality of posted prices in the continuous-time limit. Our main result considers the limit case of a continuum of buyers, establishing that for arbitrary independent buyers' valuations, posted prices and capacity rationing can implement the optimal anonymous mechanism. Our result departs from the literature in three ways: It does not make any regularity assumptions, it considers the case of general, not necessarily i.i.d., arrivals, and finally, not only posted prices but also capacity rationing takes part in the optimal mechanism. Additionally, if supply is unlimited, we show that the rationing effect vanishes, and the optimal mechanism can be implemented using posted prices only, \`a la Board (2008). |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.11738 |
| By: | Xinyu Li |
| Abstract: | This paper explores how ad platforms can utilize Bayesian persuasion within blockchain-based auction systems to strategically influence advertiser behavior despite increased transparency. By integrating game-theoretic models with machine learning techniques and the principles of blockchain technology, we analyze the role of strategic information disclosure in ad auctions. Our findings demonstrate that even in environments with inherent transparency, ad platforms can design signals to affect advertisers' beliefs and bidding strategies. A detailed case study illustrates how machine learning can predict advertiser responses to different signals, leading to optimized signaling strategies that increase expected revenue. The study contributes to the literature by extending Bayesian persuasion models to transparent systems and providing practical insights for auction design in the digital advertising industry. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.07392 |
| By: | Aleksandrs Slivkins |
| Abstract: | How to incentivize self-interested agents to explore when they prefer to exploit? Consider a population of self-interested agents that make decisions under uncertainty. They "explore" to acquire new information and "exploit" this information to make good decisions. Collectively they need to balance these two objectives, but their incentives are skewed toward exploitation. This is because exploration is costly, but its benefits are spread over many agents in the future. "Incentivized Exploration" addresses this issue via strategic communication. Consider a benign ``principal" which can communicate with the agents and make recommendations, but cannot force the agents to comply. Moreover, suppose the principal can observe the agents' decisions and the outcomes of these decisions. The goal is to design a communication and recommendation policy which (i) achieves a desirable balance between exploration and exploitation, and (ii) incentivizes the agents to follow recommendations. What makes it feasible is "information asymmetry": the principal knows more than any one agent, as it collects information from many. It is essential that the principal does not fully reveal all its knowledge to the agents. Incentivized exploration combines two important problems in, resp., machine learning and theoretical economics. First, if agents always follow recommendations, the principal faces a multi-armed bandit problem: essentially, design an algorithm that balances exploration and exploitation. Second, interaction with a single agent corresponds to "Bayesian persuasion", where a principal leverages information asymmetry to convince an agent to take a particular action. We provide a brief but self-contained introduction to each problem through the lens of incentivized exploration, solving a key special case of the former as a sub-problem of the latter. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.17086 |
| By: | Christoph Carnehl; Marco Ottaviani; Justus Preusser |
| Abstract: | This paper overviews the economics of scientific grants, focusing on the interplay between the inherent uncertainty in research, researchers' incentives, and grant design. Grants differ from traditional market systems and other science and innovation policy tools, such as prizes and patents. We outline the main economic forces specific to science, noting the limited attention given to grant funding in the economics literature. Using tools from information economics, we identify key incentive problems at various stages of the grant funding process and offer guidance for effective grant design. In the allocation stage, funders aim to select the highest-merit applications while minimizing evaluation costs. The selection rule, in turn, impacts researchers' incentives to apply and invest in their proposals. In the grant management stage, funders monitor researchers to ensure efficient use of funds. We discuss the advantages and potential pitfalls of (partial) lotteries and emphasize the effectiveness of staged grant design in promoting a productive use of grants. Beyond these broadly applicable insights, our overview highlights the need for further research on grantmaking. Understudied areas include, at the micro level, the interplay of different grant funding stages, and at the macro level, the interaction of grants with other instruments in the market for science. |
| Date: | 2024–10 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2410.12356 |
| By: | Sayantan Ghosal; Lukasz Woźny |
| Abstract: | Although a Condorcet winner commands a majority in its favor, there is no guarantee of unanimity. In a Lindahl equilibrium, a suitably chosen system of personalized transfers and prices ensures unanimity, but there is no guarantee of a majority vote in its favor. Do Lindahl equilibria decentralize Condorcet winners? In a setting where voters’ preferences are satiated, characterized by bliss points, this paper proposes a new balancedness condition which is satisfied when a Condorcet winner lies within the interior of the convex hull of voters’ bliss points. We show that such a political compromise between the most preferred policies of different voter types can be decentralized as Lindahl equilibria. |
| Keywords: | Bliss points; Condorcet winner; Lindahl equilibria, balancedness. |
| JEL: | D50 D61 D71 |
| Date: | 2024–09 |
| URL: | https://d.repec.org/n?u=RePEc:gla:glaewp:2024_08 |