MUDA: A Truthful Multi-Unit Double-Auction Mechanism

In a seminal paper, McAfee (1992) presented a truthful mechanism for double auctions, attaining asymptotically-optimal gain-from-trade without any prior information on the valuations of the traders. McAfee's mechanism handles single-parametric agents, allowing each seller to sell a single unit and each buyer to buy a single unit. This paper presents a double-auction mechanism that handles multi-parametric agents and allows multiple units per trader, as long as the valuation functions of all traders have decreasing marginal returns. The mechanism is prior-free, ex-post individually-rational, dominant-strategy truthful and strongly-budget-balanced. Its gain-from-trade approaches the optimum when the market size is sufficiently large.Comment: Accepted to the AAAI2018 conferenc

Agent-Based Computational Economics: A Constructive Approach to Economic Theory

This chapter explores the potential advantages and disadvantages of Agent-based Computational Economics (ACE) for the study of economic systems. General points are concretely illustrated using an ACE model of a two-sector decentralized market economy. Six issues are highlighted: Constructive understanding of production, pricing, and trade processes; the essential primacy of survival; strategic rivalry and market power; behavioral uncertainty and learning; the role of conventions and organizations; and the complex interactions among structural attributes, behaviors, and institutional arrangements. Extensive annotated pointers to ACE surveys, research, course materials, and software can be accessed here: http://www.econ.iastate.edu/tesfatsi/ace.htmagent-based computational economics; Learning; network formation; decentralized market economy

Repo rate patterns for new Treasury notes

Despite the enormous popularity of the market for repurchase agreements, the behavior of interest rates on "repo" transactions is not well understood. An analysis of new data for 1992-95 reveals that repo rates on recently issued Treasury notes rise and fall in a regular pattern as the Treasury auction cycle progresses.Government securities ; Treasury notes

The Convergence of Market Designs for Adequate Generating Capacity

This paper compares market designs intended to solve the resource adequacy (RA) problem, and finds that, in spite of rivalrous claims, the most advanced designs have nearly converged. The original dichotomy between approaches based on long-term energy contracts and those based on short-term capacity markets spawned two design tracks. Long-term contracts led to call-option obligations which provide market-power control and the ability to strengthen performance incentives, but this approach fails to replace the missing money at the root of the adequacy problem. Hogan’s energy-only market fills this gap. On the other track, the short-term capacity markets (ICAP) spawned long-term capacity market designs. In 2004, ISO New England proposed a short-term market with hedged performance incentives essentially based on high spot prices. In 2005 we developed for New England a forward capacity market with load obligated to purchase a target level of capacity covered by an energy call option. The two tracks have now converged on two conclusions: (1) High real-time energy prices should provide performance incentives. (2) High energy prices should be hedged with call options. We argue that two more conclusions are needed: (3) Capacity targets rather than high and volatile spot prices should guide investment, and (4) long-term physically based options should be purchased in a forward market for capacity. The result will be that adequacy is maintained, performance incentives are restored, market power and risks are reduced from present levels, and prices are hedged down to a level below the present price cap.Auctions, electricity auctions, uniform-price auctions

Predictive accuracy of political stock markets: Empirical evidence from an European perspective

In a meta study of 25 political stock markets conducted in Germany in the last decade we analyze their predictive success. Although the predictions of political stock markets are highly correlated with the corresponding polls, the markets are able to aggregate additional information. One explanatory variable for variations in predictive success of the German stock markets relative to the polls is market efficiency. Even though the overall predictions of the political stock markets are quite reliable on the aggregate level we find systematic prediction errors on the contract level that can be attributed to the vote share size and to individual trader biases. --political stock markets,forecasting,market efficiency,proportional representation

Market-Based Task Allocation Mechanisms for Limited Capacity Suppliers

This paper reports on the design and comparison of two economically-inspired mechanisms for task allocation in environments where sellers have finite production capacities and a cost structure composed of a fixed overhead cost and a constant marginal cost. Such mechanisms are required when a system consists of multiple self-interested stakeholders that each possess private information that is relevant to solving a system-wide problem. Against this background, we first develop a computationally tractable centralised mechanism that finds the set of producers that have the lowest total cost in providing a certain demand (i.e. it is efficient). We achieve this by extending the standard Vickrey-Clarke-Groves mechanism to allow for multi-attribute bids and by introducing a novel penalty scheme such that producers are incentivised to truthfully report their capacities and their costs. Furthermore our extended mechanism is able to handle sellers' uncertainty about their production capacity and ensures that individual agents find it profitable to participate in the mechanism. However, since this first mechanism is centralised, we also develop a complementary decentralised mechanism based around the continuous double auction. Again because of the characteristics of our domain, we need to extend the standard form of this protocol by introducing a novel clearing rule based around an order book. With this modified protocol, we empirically demonstrate (with simple trading strategies) that the mechanism achieves high efficiency. In particular, despite this simplicity, the traders can still derive a profit from the market which makes our mechanism attractive since these results are a likely lower bound on their expected returns

Simple Market Protocols for Efficient Risk Sharing

This paper studies the performance of four market protocols with egard to allocative efficiency and other performance criteria such as volume or volatility. We examine batch auctions, continuous double auctions, specialist dealerships, and a hybrid of these last two. All protocols are practically implementable because the messages that traders need to use are simple. We test the protocols by running (computerized) experiments in an environment that controls for tradersÕ behavior and rules out any informational effect. We find that all protocols generically converge to the efficient allocation in finite time. An extended comparison over other performance criteria produces no clear winner, but the presence of a specialist is associated with the best all-round performance.market microstructure, allocative efficiency, comparison of market institutions, performance criteria.

Constructivist and Ecological Rationality in Economics

When we leave our closet, and engage in the common affairs of life, (reason's) conclusions seem to vanish, like the phantoms of the night on the appearance of the morning; and 'tis difficult for us to retain even that conviction, which we had attained with difficulty (Hume, 1739/, p 507). we must constantly adjust our lives, our thoughts and our emotions, in order to live simultaneously within different kinds of orders according to different rules. If we were to apply the unmodified, uncurbed rules (of caring intervention to do visible 'good') of the small band or troop, or our families to the (extended order of cooperation through markets), as our instincts and sentimental yearnings often make us wish to do, we would destroy it. Yet if we were to always apply the (noncooperative) rules of the extended order to our more intimate groupings, we would crush them. (Hayek, 1988, p 18). (Italics are his, parenthetical reductions are mine).behavioral economics; experimental economics

The Effects of Penalty Design on Market Performance: Experimental Evidence from an Emissions Trading Scheme with Auctioned Permits

This paper investigates the behavioural implications of penalty designs on market performance using an experimental method. Three penalty types and two penalty levels are enforced in a laboratory permit market with auctioning, including the Australian Carbon Pollution Reduction Scheme proposed design of tying the penalty rate to the auction price. Compliance strategies are limited to undertaking irreversible abatement investment decisions or buying permits. We aim to assess how penalty design under the presence of subjects‟ risk preferences might affect compliance incentives, permit price discovery, and efficiency. In contrast to theory, we find that penalty levels serve as a focal point that indicates compliance costs and affects compliance strategies. The make-good provision penalty provides stronger compliance incentives than the other penalty types. However, the theory holds with regard to permit price discovery, as we find no evidence of the effect of penalty design on auction price. Interestingly, risk preference does not directly affect compliance decision, but it does influence price discovery, which evidently is a significant factor in compliance decisions as well as efficiency. Most importantly, a trade-off between investment incentives and efficiency is observed.emissions trading, penalty design, experiment, auction, irreversible investment, abatement, compliance, Environmental Economics and Policy, Resource /Energy Economics and Policy,

Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations

Repo auctions are used to inject central bank funds against collateral into the banking sector. The ECB uses standard discriminatory auctions and hundreds of banks participate. The amount auctioned over the monthly reserve maintenance period is in principle exactly what banks collectively need to fulfil reserve requirements. We study bidder-level data and find: (i) Bidder behavior is different from what is documented for treasury auctions. Private information and the winner’s curse seem to be relatively unimportant. (ii) Underpricing is positively related to the difference between the interbank rate and the auction minimum bid rate, with the latter appearing to be a binding constraint. (iii) Bidders are more aggressive when the imbalance of awards in the previous auction is larger. (iv) Large bidders do better than small bidders. Some of our findings suggests that bidders are concerned with the loser’s nightmare and have limited amounts of the cheapest eligible collateral.Repo auctions, Multiunit auctions, Reserve requirements, Loser’s nightmare, Money markets, Central bank, Collateral, Open market operations