Contributions published at Organizational Design

We develop a novel geometric approach to mechanism design using an important result in convex analysis: the duality between a closed convex set and its support function. By deriving the support function for the set of feasible interim values we extend the wellknown Maskin-Riley-Matthews-Border conditions for reduced-form auctions to social choice environments. We next refine the support function to include incentive constraints using a geometric characterization of incentive compatibility. Borrowing results from majorization theory that date back to the work of Hardy, Littlewood, and Pólya (1929) we elucidate the "ironing" procedure introduced by Myerson (1981) and Mussa and Rosen (1978). The inclusion of Bayesian and dominant strategy incentive constraints result in the same support function, which establishes equivalence between these implementation concepts. Using Hotelling's lemma we next derive the optimal mechanism for any social choice problem and any linear objective, including revenue and surplus maximization. We extend the approach to include general concave objectives by providing a fixed-point condition characterizing the optimal mechanism. We generalize reduced-form implementation to environments with multi-dimensional, correlated types, non-linear utilities, and interdependent values. When value interdependencies are linear we are able to include incentive constraints into the support function and provide a condition when the second-best allocation is ex post incentive compatible.

We develop a network-flow approach for characterizing interim-allocation rules that can be implemented by ex post allocations. Our method can be used to characterize feasible interim allocations in general multi-unit auctions where agents face capacity constraints, both ceilings and floors. Applications include a variety of settings of practical interest, ranging from individual and group-specific capacity constraints, set-aside sale, partnership dissolution, and government license reallocation.

There is a debate in the literature about the arguments of utility in expected utility theory. Some implicitly assume utility is defined on final wealth whereas others argue it may be defined on initial wealth and income separately. I argue that making income and wealth separate arguments of utility has important implications that may not be widely recognized. A framework is presented that allows the unified treatment of expected utility models and anomalies. I show that expected utility of income models can predict framing induced preference reversals, a willingness to pay-willingness to accept gap for lotteries, and choice-value preference reversals. The main contribution is a theorem. It is proved that for all utility functions where initial wealth and income enter separately, either there will be preference reversals or preferences can be represented by a utility function defined on final wealth alone.

We consider a standard social choice environment with linear utilities and independent, one-dimensional, private types. We prove that for any Bayesian incentive compatible mechanism there exists an equivalent dominant strategy incentive compatible mechanism that delivers the same interim expected utilities for all agents and the same ex ante expected social surplus. The short proof is based on an extension of an elegant result due to Gutmann et al. (Annals of Probability, 1991). We also show that the equivalence between Bayesian and dominant strategy implementation generally breaks down when the main assumptions underlying the social choice model are relaxed, or when the equivalence concept is strengthened to apply to interim expected allocations.

Many labor markets share three stylized facts: employers cannot give full attention to all candidates, candidates are ready to provide information about their preferences for particular employers, and employers value and are prepared to act on this information. In this paper we study how a signaling mechanism, where each worker can send a signal of interest to one employer, facilitates matches in such markets. We find that introducing a signaling mechanism increases the welfare of workers and the number of matches, while the change in firm welfare is ambiguous. A signaling mechanism adds the most value for balanced markets.

Several labor markets, including the job market for new Ph.D. economists, have recently developed formal signaling mechanisms. We show that such mechanisms are harmful for some environments. While signals transmit previously unavailable information, they also facilitate information asymmetry that leads to coordination failures. In particular, we consider a two-sided matching game of incomplete information between firms and workers. Each worker has either the same “typical” known preferences with probability close to one or “atypical” idiosyncratic preferences with the complementary probability close to zero. Firms have known preferences over workers. We show that under some technical condition if at least three firms are responsive to some workerʼs signal, the introduction of signaling strictly decreases the expected number of matches.

We employ laboratory methods to study stability of competitive equilibrium in Scarf's economy (International Economic Review, 1960). Tatonnement theory predicts that prices are globally unstable for this economy, i.e. unless prices start at the competitive equilibrium they oscillate without converging. Anderson et al. (Journal of Economic Theory, 2004) report that in laboratory double auction markets, prices in the Scarf economy do indeed oscillate with no clear sign of convergence. We replicate their experiments and confirm that tatonnement theory predicts the direction of price changes remarkably well. Prices are globally unstable with adverse effects for the economy's efficiency and the equitable distribution of the gains from trade. We also introduce a novel market mechanism where participants submit demand schedules and prices are computed using Smale's global Newtonian dynamic (American Economic Review, 1976). We show that for the Scarf economy, submitting a competitive schedule, i.e. a set of quantities that maximize utility taking prices as given, is a weakly dominant strategy. The resulting outcome corresponds to the unique competitive equilibrium of the Scarf economy. In experiments that employ the schedule market, prices do not oscillate but instead converge quickly to the competitive equilibrium. Besides stabilizing prices, the schedule market is more efficient and results in highly egalitarian outcomes.

Charness and Dufwenberg (American Economic Review, June 2011, 1211-1237) have recently demonstrated that cheap-talk communication raises efficiency in bilateral contracting situations with adverse selection. We replicate their finding and check its robustness by introducing competition between agents. We find that communication and competition act as "substitutes:" communication raises efficiency in the absence of competition but lowers efficiency with competition, and competition raises efficiency without communication but lowers efficiency with communication. We briefly review some behavioral theories that have been proposed in this context and show that each can explain some but not all features of the observed data patterns. Our findings highlight the fragility of cheap-talk communication and may serve as a guide to refine existing behavioral theories.

Traders' values and information typically consist of both private and common-value elements. In such environments, full allocative efficiency is impossible when the private rate of information substitution differs from the social rate (Jehiel and Moldovanu, 2001). We link this impossibility result to a failure of the efficient market hypothesis, which states that prices adequately reflect all available information (Fama, 1970, 1991). The intuition is that if prices were able to reveal all information then the common value would simply shift traders' private values by a known constant and full allocative efficiency would result. In a series of laboratory experiments we study price formation in markets with private and common values. Rational expectations, which form the basis for the efficient market hypothesis, predict that the introduction of common values has no adverse consequences for allocative and informational efficiency. In contrast, a "private" expectations model in which traders' optimal behavior depends on both their private and common-value information predicts that neither full allocative nor full informational efficiency is possible. We test these competing hypotheses and find that the introduction of common values lowers allocative efficiency by 28% on average, as predicted by the private expectations model, and that market prices differ significantly and substantially from their rational expectation levels. Finally, a comparison of observed and predicted payoffs suggests that observed behavior is close to the equilibrium predicted by the private expectations model.

It is still an open question when groups perform better than individuals in intellectual tasks. We report that in a company takeover experiment, groups placed better bids than individuals and substantially reduced the winner’s curse. This improvement was mostly due to peer pressure over the minority opinion and to learning. Learning took place from interacting and negotiating consensus with others, not simply from observing their bids. When there was disagreement, what prevailed was not the best proposal but the one of the majority. Groups underperformed with respect to a “truth wins” benchmark although they outperformed individuals deciding in isolation.

This paper reports results from a series of laboratory experiments designed to evaluate the impact of exposure risk on market performance. Exposure risk arises when there are complementarities between trades, e.g. when the purchase of a new house requires selling the old one. The continuous double auction (CDA), which has proven to be remarkably effective in a wide variety of settings, performs poorly in a treatment with high exposure risk: overall market efficiency is only 20% and there are many instances of no trade. In a parallel treatment with lower exposure risk, efficiency under the CDA is higher (55%) but is dominated, for instance, by a top-trading-cycles procedure that uses no money. The CDA's poor performance does not depend on whether house values are private information or common knowledge, indicating that exposure risk is due to strategic uncertainty not objective uncertainty about others' preferences. We introduce a simple package market and show that it effectively resolves exposure risk: efficiency levels are 82% and 89% respectively for the low and high exposure treatments. The proposed package market is a simple extension of the CDA and could potentially be applied in a variety contexts.

This paper examines whether and how cheap talk communication can facilitate within-group coordination when two unequal sized groups compete for a prize that is shared equally among members of the winning group, regardless of their (costly) contributions to the group’s success. We find that allowing group members to communicate before making contribution decisions improves coordination. To measure how much miscoordination remains, we employ a control treatment where miscoordination is eliminated by asking group members to reach a unanimous contribution decision. Average group contributions are not significantly different in this control treatment. Cheap talk communication thus completely solves miscoordination within groups and makes group members act as a single agent. Furthermore, it is the larger group that benefits from communication at the expense of the smaller group. Finally, content analysis of group communication reveals that after the reduction of within-group strategic uncertainty, groups reach self-enforcing agreements on how much to contribute, designate specific contributors according to a rotation scheme, and quickly discover the logic of the mixed-strategy equilibrium.

This study compares individual preferences across incentives (i.e., hypothetical vs. real incentives) and over time (i.e. elicitation at two different points in time) in a choice experiment involving charitable donating decisions. We provide evidence of hypothetical bias but little evidence of instability of individual giving. There is significant heterogeneity in individual preferences, with real incentives either dampening or pronouncing the observed donating behaviour. Neither hypothetical bias nor instability is observed when we examine the propensity of individuals to make internally consistent decisions over identical choices.

We use laboratory experiments to test for one of the foundations of the rational voter paradigm - that voters respond to probabilities of being pivotal. We exploit a setup that entails stark theoretical effects of information concerning the preference distribution (as revealed through polls) on costly participation decisions. The data reveal several insights. First, voting propensity increases systematically with subjects' predictions of their preferred alternative's advantage. Consequently, pre-election polls do not exhibit the detrimental welfare effects that extant theoretical work predicts. They lead to more participation by the expected majority and generate more landslide elections. Finally, we investigate subjects' behavior in polls and identify when Bandwagon and Underdog Effects arise.

Costless pre-play communication has been found to effectively facilitate coordination and enhance efficiency in games with Pareto-ranked equilibria. We report an experiment in which two groups compete in a weakest-link contest by expending costly efforts. Allowing intra-group communication leads to more aggressive competition and greater coordination than control treatments without any communication. On the other hand, allowing inter-group communication leads to less destructive competition. As a result, intra-group communication decreases while inter-group communication increases payoffs. Our experiment thus provides an example of an environment where communication can either enhance or damage efficiency. This contrasts sharply with experimental findings from public goods and other coordination games, where communication always enhances efficiency and often leads to socially optimal outcomes.

This paper reports an experiment investigating how different kinds of experience influence the endowment effect. Previous studies have investigated how the endowment effect is influenced by experience gained through repetition of decision problems and trading in natural and experimental markets. In this study we explore how it is influenced by experience of consuming elements of a potential endowment and by experience of choosing prior to acquiring an endowment. We find evidence of an endowment effect and that measured loss aversion predicts the reluctance to trade. We find no effect of consumption experience. Choice experience increases trading. Finally, we find evidence of a new species of 'splitting effect', whereby acquiring an endowment in two instalments significantly reduces trading.

When goods are substitutes, the Vickrey auction produces ecient, core outcomes that yield competitive seller revenues. In contrast, with complements, the Vickrey outcome, while ecient, is not necessarily in the core and revenue can be very low. Non-core outcomes may be perceived as unfair since there are bidders willing to pay more than the winners' payments. Moreover, non-core outcomes render the auction vulnerable to defections as the seller can attract better oers afterwards. To avoid instabilities of this type, Day and Raghavan (2007), Day and Milgrom (2007), and Day and Cramton (2012) have suggested to adapt the Vickrey pricing rule so that outcomes are in the core with respect to bidders' reported values. If truthful bidding were an equilibrium of the resulting auction, the outcomes would also be in the core with respect to bidders' true values. We show, however, that once dominant-strategy or Bayesian incentive compatibility is taken into account, the Vickrey auction is the unique candidate to implement core outcomes. In other words, if the Vickrey auction does not lead to core outcomes, no mechanism does. Our results further imply that the competitive equilibrium cannot always be implemented when goods are not substitutes. Moreover, even with substitutes, the competitive equilibrium can only be implemented when it coincides with the Vickrey outcome. Finally, for a simple environment we show that the adapted pricing rule yields lower than Vickrey revenues and inecient outcomes that are on average further from the core than Vickrey outcomes.

Multi-unit ascending auctions allow for equilibria in which bidders strategically reduce their demand and split the market at low prices. At the same time, they allow for pre- emptive bidding by incumbent bidders in a coordinated attempt to exclude entrants from the market. We consider an environment where both demand reduction and preemptive bidding are supported as equilibrium phenomena of the ascending auction. In a series of experiments, we compare its performance to that of the discriminatory auction. Strategic demand reduction is quite prevalent in the ascending auction even when entry imposes a (large) negative externality on incumbents. As a result, the ascending auction performs worse than the discriminatory auction both in terms of revenue and e¢ ciency, while en- trants’chances are similar across the two formats.

As the recipients of the 2012 science Nobel prizes gather in Stockholm to celebrate and be celebrated, News & Views shares some expert opinions on the achievements honoured.