Optimal allocation with costly inspection and discrete types under ambiguity

We consider the following problem: a principal has a good to allocate among a collection of agents who attach a private value to receiving the good. The principal, instead of using monetary transfers (i.e. charging the agents) to allocate the good, can check the truthfulness of the agents' value declaration at a cost. Under the assumption that the agents' valuations are drawn from a discrete set of values at random, we characterize the class of optimal Bayesian mechanisms which are symmetric, direct and maximizing the expected value of assigning the good to the principal minus the cost of verification using such standard finite-dimensional optimization tools as linear programming and submodular functions, thus extending the work of [R.V. Vohra, Optimization and mechanism design, Math. Program. 134 (2012), pp. 283–303]. Our results are discrete-type analogs of those of [E. Ben-Porath, E. Dekel, and B.L. LipmanBen-Porath, Optimal allocation with costly verification, Amer. Econ. Rev. 104 (2014), pp. 3779–3813]. When the distribution of valuations is not known but can be one of a set of distributions (the case referred to as ambiguity), we compute a robust allocation mechanism by maximizing the worst-case expected value of the principal in two cases amenable to solution with two suitable assumptions on the set of distributions. © 2017 Informa UK Limited, trading as Taylor & Francis Grou

Contracts as threats: On a rationale for rewarding A while hoping for B

In this paper we explore theoretically the relationship between explicit and implicit/relational contracting distinguishing between the ex-ante decision to sign an explicit contract and the ex-post decision wheter to actually apply it. We show, among other things, that the relational efficient explicit contract tends to display overcontracting on tasks or qualitative requirements (A) that are verifiable but apparently of little use for the principal. The ex-post (non)implementation of such explicit contract can then be discretionally exchanged against the provision of non contractible tasks (B) that are highly valuable for the principal. An empirical implication of the result, consistent with casual observation in procurement, is that penalties for infringements established by explicit contracts are seldom exercised, even though violations take place and are easy to monitor and verify

Information in Mechanism Design

We survey the recent literature on the role of information for mechanism design. We specifically consider the role of endogeneity of and robustness to private information in mechanism design. We view information acquisition of and robustness to private information as two distinct but related aspects of information management important in many design settings. We review the existing literature and point out directions for additional future work.Mechanism Design, Information Acquisition, Ex Post Equilibrium, Robust Mechanism Design, Interdependent Values, Information Management

Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions. .

Starting from an example of the Allies’ decision to feint at Calais and attack Normandy on D-Day, this paper models misrepresentation of intentions to competitors or enemies. Allowing for the possibility of bounded strategic rationality and rational players’ responses to it yields a sensible account of lying via costless, noiseless messages. In some leading cases, the model has generically unique pure-strategy sequential equilibria, in which rational players exploit boundedly rational players, but are not themselves fooled. In others, the model has generically essentially unique mixed-strategy sequential equilibria, in which rational players’ strategies protect all players from exploitation.

Ambiguity and Social Interaction

We examine the impact of ambiguity on economic behaviour. We present a relatively non-technical account of ambiguity and show how it may be applied in economics. Optimistic and pessimistic responses to ambiguity are formally modelled. We show that pessimism has the effect of increasing (decreasing) equilibrium prices under Cournot (Bertrand) competition. We also examine the effects of ambiguity on peace processes. It is shown that ambiguity can act to select equilibria in coordination games with multiple equilibria. Some comparative statics results are derived for the impact of ambiguity in games with strategic complements.

Dealing with Major Technological Risks

This article is concerned with the management of major hazards stemming from technology and entailing potentially dreadful consequences. It proposes a brief survey of the0501n difficulties and policy issues arising both in public and private decision making when dealing with major technological risks. Three themes are considered: risk assessment, risk sharing and risk control. Issues related to evaluation methods, to risk perception and to the acceptable level of risk are first examined. The article then goes on to explore the problem of optimal risk sharing between the different stakeholders. The firm's liability and extended liability to the firm's partners are considered. Insurance issues are also discussed. Lastly, the survey addresses the control of risks both from a prevention and from a damage mitigation point of view. The various instruments available to the State to reduce risks are reviewed and several issues are also raised with respect to the measures firms can take to reduce risks. Investment in safety, human error, organisational design and information disclosure are addressed in this section. The topics of siting and urban planning are analysed as mitigation strategies, and the important aspect of emergency planning ends the survey. Cet article d'intérêt général porte sur la gestion des risques d'origine technologique aux conséquences potentiellement catastrophiques. Il s'agit d'un document de synthèse destiné à cerner les problèmes fondamentaux en matière de gestion publique et privée des risques technologiques majeurs. Trois thèmes y sont traités: l'évaluation, la distribution et le contrôle des risques. Les questions se rapportant aux méthodes d'évaluation, à la perception des risques et aux difficultés liées à l'établissement d'un seuil de tolérance sont d'abord passées en revue. La seconde partie du document met en lumière les difficultés que présente le partage optimal du risque entre les différents agents. La responsabilité civile de la firme et de ses partenaires est alors examinée. Les problèmes liés à l'assurance contre ce type de risque sont aussi brièvement décrits. Cet article traite enfin du contrôle des risques en couvrant à la fois les approches préventives et les stratégies d'atténuation des dommages. On y aborde premièrement les instruments de contrôle dont dispose l'État pour réduire les risques. Du côté des firmes, les sujets tels que l'investissement en sécurité, l'erreur humaine, le design organisationnel et la divulgation de l'information sont passés en revue. L'aménagement du territoire et la gestion des urgences sont ensuite abordés de façon succincte dans la dernière partie de l'article.Safety, major risks, risk assessment, risk sharing, risk control, prevention, mitigation, Sécurité, risques majeurs, évaluation des risques, distribution des risques, contrôle des risques, prévention, atténuation

ASSET, ACTIVITY, AND INCOME DIVERSIFICATION AMONG AFRICAN AGRICULTURALISTS: SOME PRACTICAL ISSUES

This paper starts from the premise that diversification of assets, activities, and incomes is important to African rural households, in that diversification into nonfarm income constitutes on average about 45 percent of incomes, and the push and pull factors driving that diversification are bound to persist. From that premise, we noted that the empirical study of diversification has been beset by practical problems and issues relating to (1) definitions and concepts, (2) data collection, and to (3) measurement of the nature and extent of diversification. The paper addressed each of those problems. Two points are of special interest to the overall conceptualization of diversification research. The first is that empirical studies have exhibited a wide variety - bordering on confusion - of systems of classification of assets, activities, and incomes as pertains to diversification behavior. We argued that the classification should conform to that used in standard practice of national accounts and macro input-output table construction, classifying activities into economic sectors that have standard definitions, and the classification of which does not depend on the location or functional type (wage- or self-employment) of the activity. We further argued that given a sectoral classification, it is useful to make a functional and locational categorization of the activity, and keep each of these three dimensions of the activity - sectoral, functional, and locational - separate and distinct so as to avoid confusion. The second is that it is useful to have an image of a production function in mind when analyzing the components of diversification behavior: (1) assets are the factors of production, representing the capacity of the household to diversify; (2) activities are the ex ante production flows of asset services; (3) incomes are the ex post flows of incomes, and it is crucial to note that the goods and services produced by activities need to be valued by prices, formed by markets at meso and macro levels, in order to be the measured outcomes called incomes. "Livelihoods" is a term used frequently in recent diversification research, and while its meaning differs somewhat over studies, it generally means household and community behavior, with respect to holdings and use of assets and the productive activities to which the assets are applied. The link between livelihoods and incomes needs to be made by valuing the output of livelihood activities at market (and/or virtual) prices. That valuation permits an analytical link between household/community behavior (thus a micro view of diversification) and the aggregate functioning of markets (thus a link with the meso and macro levels and the policies pertaining thereto).Agribusiness, O, Q12,

Capital structure and investment dynamics with fire sales

We study a general equilibrium model in which firms choose their capital structure optimally, trading off the tax advantages of debt against the risk of costly default. The costs of default are endogenous: bankrupt firms are forced to liquidate their assets, resulting in a fire sale if there is insufficient liquidity in the market. When the corporate income tax rate is zero, the optimal capital structure is indeterminate, there are no fire sales, and the equilibrium is Pareto efficient. When the tax rate is positive, the optimal capital structure is uniquely determined, default occurs with positive probability, firms’ assets are liquidated at fire-sale prices, and the equilibrium is constrained inefficient. More precisely, firms’ investment is too low and, although the capital structure is chosen optimally, in equilibrium too little debt is used. We also show that introducing more liquidity into the system can be counter-productive: although it reduces the severity of fire sales, it also reduces welfare

Designing and Optimizing Matching Markets

Matching market design studies the fundamental problem of how to allocate scarce resources to individuals with varied needs. In recent years, the theoretical study of matching markets such as medical residency, public housing and school choice has greatly informed and improved the design of such markets in practice. Impactful work in matching market design frequently makes use of techniques from computer science, economics and operations research to provide end–to-end solutions that address design questions holistically. In this dissertation, I develop tools for optimization in market design by studying matching mechanisms for school choice, an important societal problem that exemplifies many of the challenges in effective marketplace design. In the first part of this work I develop frameworks for optimization in school choice that allow us to address operational problems in the assignment process. In the school choice market, where scarce public school seats are assigned to students, a key operational issue is how to reassign seats that are vacated after an initial round of centralized assignment. We propose a class of reassignment mechanisms, the Permuted Lottery Deferred Acceptance (PLDA) mechanisms, which generalize the commonly used Deferred Acceptance school choice mechanism and retain its desirable incentive and efficiency properties. We find that under natural conditions on demand all PLDA mechanisms achieve equivalent allocative welfare, and the PLDA based on reversing the tie-breaking lottery during the reassignment round minimizes reassignment. Empirical investigations on data from NYC high school admissions support our theoretical findings. In this part, we also provide a framework for optimization when using the prominent Top Trading Cycles (TTC) mechanism. We show that the TTC assignment can be described by admission cutoffs, which explain the role of priorities in determining the TTC assignment and can be used to tractably analyze TTC. In a large-scale continuum model we show how to compute these cutoffs directly from the distribution of preferences and priorities, providing a framework for evaluating policy choices. As an application of the model we solve for optimal investment in school quality under choice and find that an egalitarian distribution can be more efficient as it allows students to choose schools based on idiosyncracies in their preferences. In the second part of this work, I consider the role of a marketplace as an information provider and explore how mechanisms affect information acquisition by agents in matching markets. I provide a tractable “Pandora's box” model where students hold a prior over their value for each school and can pay an inspection cost to learn their realized value. The model captures how students’ decisions to acquire information depend on priors and market information, and can rationalize a student’s choice to remain partially uninformed. In such a model students need market information in order to optimally acquire their personal preferences, and students benefit from waiting for the market to resolve before acquiring information. We extend the definition of stability to this partial information setting and define regret-free stable outcomes, where the matching is stable and each student has acquired the same information as if they had waited for the market to resolve. We show that regret-free stable outcomes have a cutoff characterization, and the set of regret-free stable outcomes is a non-empty lattice. However, there is no mechanism that always produces a regret-free stable matching, as there can be information deadlocks where every student finds it suboptimal to be the first to acquire information. In settings with sufficient information about the distribution of preferences, we provide mechanisms that exploit the cutoff structure to break the deadlock and approximately implement a regret-free stable matching