Subsidies, Knapsack Auctions and Dantzig’s Greedy Heuristic

Abstract:

A budget-constrained buyer wants to purchase items from a shortlisted set.
Items are differentiated by quality and sellers have private reserve prices for
their items. Sellers quote prices strategically, inducing a knapsack game.
The buyer’s problem is to select a subset of maximal quality. We propose
a buying mechanism which can be viewed as a game theoretic extension of
Dantzig’s greedy heuristic for the classic knapsack problem. We use Monte
Carlo simulations to analyse the performance of our mechanism. Finally,
we discuss how the mechanism can be applied to award R&D subsidies.
JEL classification: D21, D43, D44, D45
Keywords: Auctions, Subsidies, Market Design, Knapsack Problem

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254.pdf

Optimal Contracts for Lenient Supervisors

Abstract:

We consider a situation where an agent's effort is monitored by a supervisor who cares for the agent's well being. This is modeled by incorporating the agent's utility into the utility function of the supervisor. The first best solution can be implemented even if the supervisor's preferences are unknown. The corresponding optimal contract is similar to what we observe in practice: The supervisor's wage is constant and independent of his report. It induces one type of supervisor to report the agent's performance truthfully, while all others report favorably independent of performance. This implies that overstated performance (leniency bias) may be the outcome of optimal contracts under informational asymmetries.
Keywords: Subjective performance evaluation, leniency, supervisor, private infrmation
JEL classification: D82, D86, J33, M52
June 2008

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237.pdf

Allocation of Authority when a Person is not a Robot

Abstract:

We formalize a conception of authority, which is commonly defined as the right of controlling a person’s actions embedded in human assets in sociology. Due to the inalienable property of human assets, the contractible formal authority is hard to verify and enforce, while real authority usually diverges from formal authority. Inefficiency tends to arise when a task is not routine or can not be done by a robot. Using a framework of incomplete contract, we show that allocation of formal authority, as an instrument to mitigate the inefficiency, is determined by features of tasks and specificity of assets, and the relationship between the resources. Monitoring is then introduced to fine tune value of delegation.
Keywords: Transaction of human assets, real authority, formal authority, delegation, monitor
JEL classification: D23, J24, J41, L22.
July 2007

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211.pdf

Efficient Inequity–Averse Teams

Abstract:

This paper analyzes the efficiency of team production when agents exhibit other regarding preferences. It is shown that full efficiency can be sustained as an equilibrium through a budget-balancing mechanism that punishes some randomly chosen agents if output falls short of efficient level but distributes the output equally otherwise, provided that the agents are sufficiently inequity averse.
Keywords: moral hazard, team production, inequity aversion
JEL classification: C7, D7, D63, L2
May 2007

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210.pdf

License Auctions with Royalty Contracts for (Winners and) Losers

Abstract:

This paper revisits the licensing of a non–drastic process innovation by an outside innovator to a Cournot oligopoly. We propose a new mechanism that combines a restrictive license auction with royalty licensing. This mechanism is more profitable than standard license auctions, auctioning royalty contracts, fixed–fee licensing, pure royalty licensing, and two-part tariffs. The key features are that royalty contracts are auctioned and that losers of the auction are granted the option to sign a royalty contract. Remarkably, combining royalties for winners and losers makes the integer constraint concerning the number of licenses irrelevant.
Keywords: patents, licensing, auctions, royalty, innovation, R&D, mechanism design
JEL classification: D21, D43, D44, D45
April 2007

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199.pdf

Collective Production and Incentives

Abstract:

We analyse incentive problems in collective production environments where contributors are compensated according to their observed and ranked efforts. This provides incentives to the contributors to choose first best efforts.
December 2006

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186.pdf

How eBay Sellers set “Buy-it-now” prices - Bringing The Field Into the Lab

Abstract:

In this paper we introduce a new type of experiment that combines the advantages of lab and field experiments. The experiment is conducted in the lab but using an unchanged market environment from the real world. Moreover, a subset of the standard subject pool is used, containing those subjects who have experience in conducting transactions in that market environment. This guarantees the test of the theoretical predictions in a highly controlled environment and at the same time enables not to miss the specific features of economic behavior exhibited in the field. We apply the proposed type of experiment to study seller behavior in online auctions with a Buy-It-Now feature, where early potential bidders have the opportunity to accept a posted price offer from the seller before the start of the auction. Bringing the field into the lab, we invited eBay buyers and sellers into the lab to participate in a series of auctions on the eBay platform. We investigate how traders' experience in a real market environment influences their behavior in the lab and whether abstract lab experiments bias subjects' behavior.
Keywords: online auctions, experiments, buyout prices
JEL classification: C72, C91, D44, D82
November 2006

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181.pdf

Do individuals recognize cascade behavior of others? An Experimental Study

Abstract:

In an information cascade experiment participants are confronted with artificial predecessors predicting in line with the BHW model (Bikchandani et al., 1992). Using the BDM (Becker et al., 1964) mechanism we study participants' probability perceptions based on maximum prices for participating in the prediction game. We find increasing maximum prices the more coinciding predictions of predecessors are observed, regardless of whether additional information is revealed by these predictions. Individual price patterns of more than two thirds of the participants indicate that cascade behavior of predecessors is not recognized.
Keywords: information cascades, Bayes' Rule, decision under risk and uncertainty, experimental economics
JEL classification: C91, D81, D82
October 2006

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180.pdf

Revenue Equivalence Revisited

Abstract:

The conventional wisdom in the auction design literature is that first price sealed bid auctions tend to make more money while ascending auctions tend to be more efficient. We re-examine these issues in an environment in which bidders are allowed to endogenously choose in which auction format to participate. Our findings are that more bidders choose to enter the ascending auction than the first price sealed bid auction and this extra entry is enough to make up the revenue difference between the formats. Consequently, we find that both formats raise approximately the same amount of revenue. They also generate efficiency levels and bidder earnings that are roughly equivalent across mechanisms though the earnings in the ascending might be slightly higher. In expected utility terms though, we find that the expected utility of entering a first price sealed bid auction is greater than entering an ascending for any risk averse bidder suggesting that we are seeing “overentry” into the ascending auctions.
Keywords: bidder preferences, private values, sealed bid auctions, ascending auctions, endogenous entry
JEL classification: C91, D44
October 2006

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175.pdf

Anomalies in Auction Choice Behavior

Abstract:

Ivanova-Stenzel and Salmon (2004a) established some interesting yet puzzling results regarding bidders’ preferences between auction formats. The finding is that bidders strongly prefer the ascending to the first price sealed bid auction on a ceteris paribus basis but they are not willing to pay up to an entry price for entering into an ascending auction instead of a first price that would equalize the profits between the two. While it was found that risk aversion on the part of the bidders could resolve this anomaly the claim that risk aversion drives overbidding in first price auctions is somewhat controversial. In this study we examine two competing explanations for the observed behavior; loss aversion and “clock aversion”, i.e. a dislike for some aspect of the clock based bidding mechanism. We find that neither alternative explanation can account for bidders’ auction choice behavior leaving risk aversion as the only un-falsified hypothesis.
Keywords: bidder preferences, private values, sealed bid auctions, ascending auctions
JEL classification: C91, D44
October 2006

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174.pdf

Procurement with Costly Bidding, Optimal Shortlisting, and Rebates

Abstract:

We consider the procurement of a complex, indivisible good when bid preparation is costly, assuming a population of heterogeneous contractors. Shortlisting is introduced to implement the optimal number of bidders, and we explore whether the procurer should reimburse the nonrecoverable cost of preparing a bid in whole or in part. We find that a reimbursement policy is profitable for the procurer only if performance and bidding costs are negatively correlated. Moreover, negative rebates (entry fees) always dominate positive rebates.
Keywords: Procurement, Auctions, Entry
JEL classification: D44, D45
September 2006

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166.pdf

Research Joint Ventures, Optimal Licensing, and R&D Subsidy Policy

Abstract:

We reconsider the justifications of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to pool R&D investments and license innovations. In equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic benefits of R&D investment in the subsequent oligopoly game. Nevertheless, governments subsidize their domestic firms in order to raise their bargaining position in the joint venture. This holds true regardless of whether governments offer either unconditional or conditional subsidies. This suggests an alternative explanation of the observed proliferation of R&D subsidies.
Keywords: patent licensing, industrial organization, R&D subsidies, research joint ventures, technology policy
JEL classification: L13, O34
September 2006

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165.pdf

How to Allocate R&D (and Other) Subsidies: An Experimentally Tested Policy Recommendation

Abstract:

This paper evaluates how R&D subsidies to the business sector are typically awarded. We identify two sources of ine_ciency: the selection based on a ranking of individual projects, rather than complete allocations, and the failure to induce competition among applicants in order to extract and use information about the necessary funding. In order to correct these ine_- ciencies we propose mechanisms that include some form of an auction in which applicants bid for subsidies. Our proposals are tested in a simulation and in controlled lab experiments. The results suggest that adopting our proposals may considerably improve the allocation.
Keywords: Research, Subsidies, Experimental Economics
JEL classification: D44, D45, H25, O32, O38
October 2005

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108.pdf

License Auctions with Royalty Contracts for Losers

Abstract:

This paper revisits the standard analysis of licensing a cost reducing innovation by an outside innovator to a Cournot oligopoly. We propose a new mechanism that combines elements of a license auction with royalty licensing by granting the losers of the auction the option to sign a royalty contract. The optimal new mechanism eliminates the losses from exclusionary licensing without reducing bidders’ surplus; therefore, it is more profitable than both standard license auctions and pure royalty licensing. We also take into account that the number of licenses must be an integer, which is typically ignored in the literature.
Keywords: Patents, Licensing, Auctions, Royalty, Innovation, R&D, Mechanism Design
JEL classification: D21, D43, D44, D45
January 2006

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96.pdf

Procurement of Goods and Services – Scope and Government

Abstract:

December 2005

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93.pdf

Price formation in a sequential selling mechanism

Abstract:

This paper analyzes the trade of an indivisible good within a two-stage mechanism, where a seller first negotiates with one potential buyer about the price of the good. If the negotiation fails to produce a sale, a second–price sealed–bid auction with an additional buyer is conducted. The theoretical model predicts that with risk neutral agents all sales take place in the auction rendering the negotiation prior to the auction obsolete. An experimental test of the model provides evidence that average prices and profits are quite precisely predicted by the theoretical benchmark. However, a significant large amount of sales occurs already during the negotiation stage. We show that risk preferences can theoretically account for the existence of sales during the negotiation stage, improve the fit for buyers’ behavior, but is not sufficient to explain sellers’ decisions. We discuss other behavioral explanations that could account for the observed deviations.
Keywords: auction, negotiation, combined mechanism, sequential mechanism, risk preferences, experiment
JEL classification: C72, C91, D44, D82
October 2005

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92.pdf

Courtesy and Idleness: Gender Differences in Team Work and Team Competition

Abstract:

Does gender play a role in the context of team work? Our results based on a real-effort experiment suggest that performance depends on the composition of the team. We find that female and male performance differ most in mixed teams with revenue sharing between the team members, as men put in significantly more effort than women. The data also indicate that women perform best when competing in pure female teams against male teams whereas men perform best when women are present or in a competitive environment.
Keywords: team incentives, gender, tournaments
JEL classification: C72, C73, C91, D82
September 2005

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91.pdf

Corruption in Procurement Auctions

Abstract:

We review different kinds of corruption that have been observed in procurement auctions and categorize them. We discuss means to avoid corruption, by choice of preferable auction formats, or with the help of technological tools, such as secure electronic bidding systems. Auctions that involve some soft elements, such as complex bids consisting of technical and financial proposals, are particularly prone to corruption. We do not believe that it is possible to eradicate corruption altogether in such situations, but we discuss means to make it less likely.
January 2006

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90.pdf

Research Joint Ventures, Licensing, and Industrial Policy

Abstract:

This paper reconsiders the explanation of R&D subsidies by Spencer and Brander (1983) and others by allowing firms to license their innovations and to pool their R&D investments. We show that in equilibrium R&D joint ventures are formed and licensing occurs in a way that eliminates the strategic benefits of R&D investment in the export oligopoly game. Nevertheless, national governments are driven to subsidize their own national firms in order to increase their strength in the joint venture bargaining game. Therefore, our analysis suggests an alternative explanation of the observed proliferation of R&D subsidies.
Keywords: patent licensing, industrial organization, R&D subsidies, research joint ventures, innovation policy
JEL classification: L13, O34
October 2005

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89.pdf

Bid Rigging. An Analysis of Corruption in Auctions

Abstract:

In many auctions, the auctioneer is an agent of the seller. This invites corruption. We propose a model of corruption in which the auctioneer orchestrates bid rigging by inviting a bidder to either lower or raise his bid, whichever is more profitable. We characterize equilibrium bidding in first- and second-price auctions, show how corruption distorts the allocation, and why both the auctioneer and bidders may have a vested interest in maintaining corruption. Bid rigging is initiated by the auctioneer after bids have been submitted in order to minimize illegal contact and to realize the maximum gain from corruption.
Keywords: auctions, procurement, corruption, right of first refusal, numerical
JEL classification: D44
May 2005

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39.pdf

A Proxy Bidding Mechanism that Elicits all Bids in an English Clock Auction Experiment

Abstract:

This paper reconsiders experimental tests of the English clock auction. We point out why the standard procedure can only use a small subset of all bids, which gives rise to a selection bias. We propose an alternative yet equivalent format that makes all bids visible, and apply it to a “wallet auction” experiment. Finally, we test the theory against various alternative hypotheses, and compare the results with those that would have been obtained if one had used the standard procedure. Our results confirm that the standard tests are subject to a significant selection bias.
Keywords: English Clock Auctions, Experimental Economics
JEL classification: D44, D45, C91
February 2005

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36.pdf

Partnership Dissolution, Complementarity, and Investment Incentives

Abstract:

Lecture on the first SFB/TR 15 meeting, Gummersbach, July, 18 - 20, 2004

We study a partnership that anticipates its possible dissolution. In our model, partnerships form in order to take advantage of complementary skills; although, new opportunities may arise that make partners' skills useless. We characterize the optimal, incentive compatible partnership contract that can be implemented by a simple call option, and then analyze the commonly used buy--sell provision. We show that this dissolution rule gives rise to inefficiency, either in the form of excessive dissolutions combined with underinvestment or efficient dissolutions combined with overinvestment. However, supplementing the buy--sell provision with the right to veto may restore efficiency.
JEL classification: D82, C78, J12, K12, L24
June 2004

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12.pdf