Optimal Multi-Object Auctions with Risk Averse Buyers

We analyze the optimal auction of multiple non-identical objects when buyers are risk averse. We show that the auction formats that yield the maximum revenue in the risk neutral case are no longer optimal. In particular, selling the goods independently does not maximize the seller's revenue. We observe that seller's incentive for bundling arises solely due to the risk aversion of the buyers. The optimal auction which remains weakly efficient has the following properties: The seller perfectly insures all buyers against the risk of losing the object(s) for which they have high valuation. While the buyers who have high valuation for both objects are compensated if they do not win either object, the buyers who have low valuation for both objects incur a positive payment to the seller in the same event.Multi-object Auctions, Optimal Auctions, Multi-dimensional Screening, Risk Averse Buyers, Bundling

Temptation and Social Security in a Dynastic Framework

We investigate welfare and aggregate implications of a pay as you go (PAYG) social security system in a dynastic framework in which agents have self-control problems. The presence of these two additional factors at the same time affects individuals’ intertemporal decision problems in two opposite directions. That is, on the one hand individuals prefer to save more because of their altruistic concerns, on the other hand, they prefer to save less because of their urge for temptation towards current consumption. Individuals’ efforts to balance between the long-term commitment (consumption smoothing and altruism) and the short-term urge for temptation result in self-control costs. In this environment the existence of social security system provides not only consumption smoothing and risk sharing mechanisms but also a channel that reduces the severity of temptation. We find that the adverse welfare effects of a PAYG system are further mitigated relative to the environments that incorporates altruism and self control issues separately.Temptation; Self-control preferences; Altruism; Social security; Dynamic general equilibrium; Overlapping generations; Welfare

Social Security Reform and Temptation

This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature indicating that the complete elimination of social security is the reform scenario that maximizes welfare improvement. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the "social security elimination" scenario loses ground very rapidly. In fact, in the case of very severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.funded social security, unfunded social security, self-control preferences

Social Security Reform with Self-Control Preferences

This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature in indicating that the complete elimination of social security is among the reform scenarios that maximize welfare. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the "social security elimination" scenario loses ground very rapidly. In fact, in the case of relatively severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.funded social security; unfunded social security; self-control preferences

Self-control Preferences and Taxation: A Quantitative Analysis in a Life Cycle Model

This paper examines the impact of various .fiscal policies, namely, taxes on consumption, lab and capital when agents have self-control preferences. Agents trade in a stochastic overlapping generations economy while facing borrowing constraints. We quantitatively show that modelling choices, such as, liquidity constraints, life-cycle structure and idiosyncratic earnings risks, that were previously considered to be critical in delivering a positive capital income tax, need not be binding in this regard. We argue and quantitatively show that for a sufficiently large measure of individuals having self-control preferences instead of CRRA preferences, or alternatively, for a sufficiently high cost of exercising self control when all individuals are self-control types, the optimal capital income tax is zero. Given there is strong empirical and experimental evidence regarding the existence of self-control problems, our model provides quite an interesting insight: as agents.self-control costs rise, the optimal capital income tax rate will converge to Chamley and Judd value.

Essays on Behavioral Public Economics and Microeconomic Theory

This dissertation consists of the three independent chapters in the areas of Public Economics and Microeconomic Theory. The first two chapters use experimental and computational techniques to address two important behavioral issues in Public Economics. In particular, the first chapter (with Lise Vesterlund) examines if concerns for status may help explain why fundraisers commonly announce past contributions to future donors. To answer this question we incorporate status concerns into the standard charitable giving model, and subsequently test the predicted comparative statics in the laboratory. Consistent with the economic prediction we find that low-status followers are likely to mimic contributions by high-status leaders and that this encourages high-status leaders to contribute. Contributions are therefore larger when individuals of high status contribute before rather than after those of low status. The second chapter (with Athanasios C. Thanopoulos) uses computational techniques to assess welfare implications of an unfunded social security system when individuals have self-control preferences. Our computation model demonstrates that the welfare costs of an unfunded social security system are substantially reduced when agents have self-control preferences. However, the positive effect of reducing self-control costs is not large enough to surpass its negative effect on capital accumulation. Finally, the third chapter (with Hadi Yektas) of the dissertation examines an important and open mechanism design question. It characterizes the necessary conditions of optimal auction for multiple objects when agents are risk-averse. We show that the optimal auction is weakly efficient; in the sense that each object is sold to a buyer who has high valuation for it, if such a buyer exists. The seller perfectly insures all buyers against the risk of losing the object(s) for which they have high valuation. While the buyers who have high valuation for both objects are compensated if they do not win either object; the buyers who have low valuation for both objects incur a positive payment in the same event. The objects are bundled to the same buyer if all buyers have low valuation for both objects, thus, independent auctions are not optimal

Managing Public Investment Funds: Best Practices and New Challenges

Large publicly-held pools of assets are playing an increasingly prominent role in the global investment arena. We compare three distinct forms of such public funds, namely foreign exchange reserve funds, sovereign wealth funds, and public pension funds, to highlight their differences and similarities. We review previous studies on ways to better secure prudent and economically sound public fund management practices in these funds, as well as how to evaluate their governance and investment policies and how to better protect the assets from political interference. Drawing from the pension and corporate finance literature, we also link their management to governance practices and country-specific characteristics, and contrast those with empirical findings on linkages with corporate governance

Optimal Multi-Object Auctions with Risk Averse Buyers

We analyze the optimal auction of multiple non-identical objects when buyers are risk averse. We show that the auction formats that yield the maximum revenue in the risk neutral case are no longer optimal. In particular, selling the goods independently does not maximize the seller's revenue. We observe that seller's incentive for bundling arises solely due to the risk aversion of the buyers. The optimal auction which remains weakly efficient has the following properties: The seller perfectly insures all buyers against the risk of losing the object(s) for which they have high valuation. While the buyers who have high valuation for both objects are compensated if they do not win either object, the buyers who have low valuation for both objects incur a positive payment to the seller in the same event

Optimal Multi-Object Auctions with Risk Averse Buyers

We analyze the optimal auction of multiple non-identical objects when buyers are risk averse. We show that the auction formats that yield the maximum revenue in the risk neutral case are no longer optimal. In particular, selling the goods independently does not maximize the seller's revenue. We observe that seller's incentive for bundling arises solely due to the risk aversion of the buyers. The optimal auction which remains weakly efficient has the following properties: The seller perfectly insures all buyers against the risk of losing the object(s) for which they have high valuation. While the buyers who have high valuation for both objects are compensated if they do not win either object, the buyers who have low valuation for both objects incur a positive payment to the seller in the same event