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Hybrid allocation mechanisms for publicly provided goods
Abstract
Motivated by efficiency and equity concerns, public resource managers have increasingly utilized hybrid allocation mechanisms that combine features of commonly used price (e.g., auction) and non-price (e.g., lottery) mechanisms. This study serves as an initial investigation of these hybrid mechanisms, exploring theoretically and experimentally how the opportunity to obtain a homogeneous good in a subsequent lottery affects Nash equilibrium bids in discriminative and uniform price auctions. The lottery imposes an opportunity cost to winning the auction, systematically reducing equilibrium auction bids. In contrast to the uniform price auction, equilibrium bids in the uniform price hybrid mechanism vary with bidder risk preferences. Experimental evidence suggests that the presence of the lottery and risk attitudes (elicited through a preceding experiment) impact auction bids in the directions predicted by theory. Finally, we find that theoretically and experimentally, the subsequent lottery does not compromise the efficiency of the auction component of the hybrid mechanisms.
... Lotteries and auctions are two common ways to allocate public resources such as health care, public housing, and recreational opportunities. Lotteries are often considered fair while auctions are perceived as efficient but unfair (Evans et al., 2009;Goodwin, 2013;Hofstee, 1990). Taylor et al. (2003) argue that a lottery is "usually employed to resolve allocation problems to reflect a spirit of fairness and equality, since everyone has an equal chance to win, regardless of whatever characteristics or qualities one may possess." ...
... Proponents of auctions often ground their argument in social welfare or efficiency (Cheung, 1974;Evans et al., 2009). Competition does not disappear after any price or quantity control but only takes different forms, such as waiting in queues, competing 1 Automobile ownership in this study refers to household auto ownership, rather than individual auto ownership. ...
... Considering the pros and cons of lotteries and auctions, a mix of these two allocation mechanisms has been increasingly implemented by governments and discussed by scholars. Evans et al. (2009) provide an example in which the permits for passing through the Panama Canal are allocated by a mix of lotteries and auctions. In relation to immigration policies, auctions are proposed as a complement to current lotteries to allocate specialty worker visas (Committee for Economic Development, 2001). ...
Lotteries and auctions are common ways of allocating public resources, but they have rarely been used simultaneously in urban transportation policies. This paper presents a unique policy experiment in Guangzhou, China, where lotteries and auctions are used in conjunction to allocate vehicle licenses. Guangzhou introduced vehicle license regulations to control the monthly quota of local automobile growth in 2012. To obtain a license, residents are required to choose between the lottery and auction method. Since the introduction of the regulations, there have been heated debates on the distributional effects of lotteries and auctions; however, the debates have not been grounded in empirical studies. We analyze the distributional effects of such mixed mode of resource allocation in a positive manner based on individual behavioral choices. We conducted a survey in January 2016 (n=1000 people ∗ 12 months) and used mixed logit models to analyze how socioeconomic status, including income and household automobile ownership, determined people’s choices among lottery, auction, and non-participation alternatives. We find that income increased participation, but did not influence non-car owners’ choices between lotteries and auctions, which contrasts with the common notion that lotteries benefit the poor. Additionally, the positive impact of car ownership on participation indicates a car-dependent trajectory for automobile growth. The significant socio-economic differentiators between lotteries and auctions were age, gender, and education. Proxies of mobility needs were insignificant overall. The program attributes had a much larger impact than all other variables—people were more likely to choose lotteries with higher winning rates and more participants and more likely to choose auctions with higher prices and more participants. We concluded that for those who participated, the choice between lotteries and auctions did not depend on their income or mobility needs but, rather, the probability of winning plates and the opportunity for speculation.
... They showed that equally likely access to the public good significantly reduced its expected benefits. The literature following Mumy and Hanke (1975) focused primarily on congestion (Harrington 1988) and allocation by lotteries and by hybrid mechanisms whereby a portion is allocated by price and the remainder through a non-price mechanism (Boyce 1994;Taylor, Tsui, Zhu 2003;Scrogin 2009;Evans, Vossler, and Flores 2009), although Che, Gale, and Kim (2013) have recently studied the assignment of initial ownership of a good when individuals differ in their wealth. They show that market mechanisms favor those able to pay, and may be less efficient than non-market assignments when reselling is allowed. ...
... We focus on the case of hybrid assignment rules previously studied in the literature. As noted in Evans, Vossler, and Flores (2009), several U.S. states have recently used hybrid mechanisms to allocate big game permits, a setting in which there is often a small number of permits available relative to total demand. In one such hybrid mechanism, a few permits are auctioned off with the remaining permits allocated via lottery. ...
Economists have long known that properly designed markets allocate resources efficiently. However, in many circumstances markets are unfeasible. In this paper, we construct a general model of access which allows us to value different assignments when resources are allocated in the absence of markets. We demonstrate that marginal value schedules are far less useful in allocating access when property rights are unattainable. The criteria for optimal allocation combine information on both the marginal value schedules and the assignments determining the probabilities of access to the resource. Our approach allows us to rank rationing policies in a wide range of real-world, second-best settings.
... In order to investigate the role of risk-attitudes 23 , we include in our econometric analysis a risk measure elicited through a lottery-choice procedure (e.g. Holt and Laury (2002)). We borrow the procedure from Evans et. al (2009), and its validity is determined by whether risk attitudes are similar across the risk elicitation and fraud experiments. We hope this is so, since the procedure used to elicit risk attitudes is reasonably similar to the decision made in the fraud experiment: in both, subjects choose between lotteries (and with whistle-blowing, a certain ...
... However, greater aversion to risk will interact with the sanctions, and must be controlled for.24 TheHolt and Laury (2002) procedure is frequently used in economic experiments(e.g.Evans et al. (2009), Dickinson (2009 andGangadharan and Nemes (2009)) and in field experiments (e.g.Harrison et al. (2007) andShearer and Bellemare (2006)). ...
... Our estimation strategy proceeds by (1) estimating applicant expectations over river characteristics for the upcoming river rafting season, (2) estimating application rates over the available river/date alternatives, and 3) using the structure of the model of application rates to characterize preference relations. Evans, Vossler, and Flores (2009) highlight the use of lotteries to provide public goods, which has included goods such as publicly distributed flu vaccines, public school choice, hunting and rafting permits, public market space for vendors, artisans, and performers, public land in Georgia, and wait lists public housing. However, the structure of the Four Rivers Lottery is such that applicants' choice endogenously determines the probability of winning. ...
... As Scrogin (2005) rightly points out, past equilibrium application rates are determined 3 Evans, Vossler, and Flores (2009) and some recent related literature develop theoretical models of hybrid allocation systems of the form of sequential or joint auction/lottery systems. Evans, Vossler, and Flores (2009) focus on unidimensional homogeneous goods, and the interaction between auctions and a lottery. As such, while this is an interesting development, it is not very useful to pursue our objectives. ...
A lottery that provides participants the opportunity to choose among a set of simple gambles over multi-attribute goods results in an endogenous distribution of win rates over gambles that reflects tradeoffs between the relative desirability of the available goods and the probability of winning. These win rates provide sufficient information to estimate hedonic prices, marginal utility, and marginal rates of substitution among attributes. We develop a model for mapping preferences from this information set and apply it to Idaho’s Four Rivers Whitewater Recreation Lottery. This lottery structure shows promise as a foundation for economic experiments for preference revelation.
... This paper contributes to the growing literature on hybrid mechanisms that provides a rationale for resource allocation strategies that combine price and non-price features (Evans et al., 2009;Condorelli, 2013;Carpenter and Matthews, 2017;Huang and Wen, 2019;Arnosti and Shi, 2020). 1 Herein, we build on Che et al. (2013a) and Che et al. (2013b) to study the optimal initial allocation of natural resource extraction rights in the presence of credit frictions. We generalize their model to the case of correlated types, as given by agents' valuations and wealth, and compare the allocative efficiency of competitive bidding in a market where agents' bids are constrained by their budgets with that of a lottery followed by resale in a secondary market. ...
We study the optimal allocation of a resource in a second-best world in which parties may be liquidity-constrained due to credit frictions and capital market imperfections. In this setting, common to various natural resource industries, agents are unable to bid more than their budget regardless of their valuation. While auction markets are widely used mechanisms for allocating natural resource extraction rights and conservation contracts, we show that in these circumstances the competitive market -which allocates items based on rank order of bids- fails to achieve the first-best allocation. The market outcome is welfare-dominated by a hybrid mechanism consisting of random assignment followed by resale in a secondary market. Via the initial lottery, the hybrid-mechanism allocates the items with positive probability to high-valuation low-wealth individuals who would not have been able to afford them in a competitive market. High-valuation high-wealth agents, on the other hand, acquire the items in the secondary market if they do not receive them in the initial lottery. Therefore, equity in the allocation of access to the resource may be justified not only by distributional concerns but also by economic efficiency. We illustrate our model using data from buybacks of harvesting rights in the seafood industry.
... While experimental instructions alone are often not sufficient for comparing the salience of social comparison between experiments, they usually specify whether payments to subjects were correlated or uncorrelated. When analyzing the literature, we found that many studies that did not observe gender differences in risk taking employed uncorrelated payments ( Lange et al., 2007 ;Charness and Gneezy, 2010 ;Evans et al., 2009 ). In contrast, in all experiments with correlated risks of which we are aware of ( Haigh and List 2005, Charness and Genicot 2009and Filippin and Crosetto, 2016, women were significantly more risk averse than men. ...
The present paper contributes to the controversy regarding gender differences in risk taking by investigating the impact of social comparison. Drawing on previous results from evolutionary biology, we argue that the social ranking is more important for men than for women, i.e. men (women) should focus more on relative (absolute) income. We develop a corresponding model of decision making under risk which predicts that risk taking is higher (lower) for positively (negatively) correlated risks than for uncorrelated risks and that this effect is stronger for men than for women. These predictions are confirmed by our first experiment. Building upon the first experiment, we show in a second experiment that we can make gender differences to appear or disappear by changing the social context in a systematic way. We conclude that social comparison and the correlation of risks may play an important role for the occurrence of gender differences in risk taking.
... The results confirm the importance of hybrid public-private mechanisms [124,125] for the multi-functional organization, enhancement and sustainability of landrace-based localized agri-food systems. At the same time, the concurrence of agrobiodiversity-dedicated integrated policies, multi-level laws and regulations with stakeholder collaboration in participatory initiatives for endangered landrace protection, market and social valorization sustains and feeds the development of tailored multi-actor polycentric governance [119], favoring coherent management with fair representation, equal protection and balanced satisfaction of the interests at stake [67,119,126,127]. ...
The international and European literature and institutional contexts are fostering agrobiodiversity as the foundation of a new paradigm for localized agri-food system development and sustainability. Accordingly, new systemic and holistic theoretical approaches and conceptual models are needed. This paper aims to identify and apply a new conceptual framework contributing to the understanding of how the restoring and valorization of underutilized or neglected landraces can act as a trigger for sustainable territorial development. A new holistic model was designed for the characterization and analysis of agrobiodiversity-oriented food systems. We consider the model innovative in enhancing the conceptualization of the adoption of a socio-ecological systems approach. We applied the model to a representative case study involving the localized agri-food system of the Valtiberina Red Onion, a threatened plant landrace cultivated in Tuscany, Italy. A participatory action–research approach was followed, involving both public and private stakeholders. As the main outcome of the paper, we demonstrated the capability of our new SES model by identifying and describing the assets, drivers, human action processes and generated beneficial effects concerning the development and reproduction of landrace-based quality valorization virtuous circles. Our research findings highlighted the model as an innovative tool for the analysis of agrobiodiversity-oriented food systems sustainability. Significantly, the model was designed to identify the combined role of public policy and private action in supporting the implementation of coherent management mechanisms and effective governance settings.
... While experimental instructions alone are often not sufficient for comparing the salience of social comparison between experiments, they usually specify whether payments to subjects were correlated or uncorrelated. When analyzing the literature, we found many studies employed uncorrelated payments that did not observe gender differences in risk taking (Lange et al., 2007;Charness and Gneezy, 2010;Evans et al., 2009). In contrast, in all experiments with correlated risks of which we are aware (Haigh and List, 2005;Charness and Genicot, 2009;Fillipin and Crosetto, 2013), women were significantly more risk averse than men. ...
The present paper contributes to the controversy regarding gender differences in risk taking by investigating the impact of social comparison. Social comparison is formalized by integrating a social reference point into the model of Köszegi and Rabin. Drawing on previous results from evolutionary biology, we hypothesize that men (women) focus more on relative (absolute) income, i.e., the relative weight of social gain-loss utility is higher for men than for women. Our model predicts that risk taking is higher for correlated than for uncorrelated risks and that this effect is stronger for men than for women. These predictions are confirmed by a simple classroom experiment. We conclude that social comparison and the correlation of risks play an important role in the discussion of gender differences in risk taking.
... Another related strand of literature focuses on hybrid auction-lottery mechanisms. Evans et al. (2009), in a paper similar to our study, examine the hybrid mechanisms with an auction implemented before a lottery and discuss buyers' bidding strategies in such mechanisms. Condorelli (2013) reveals that if buyers' values and willingness to pay do not align, a hybrid mechanism may be efficiency-optimal. ...
In this paper, we propose an equality measure for allocation mechanisms with budget constraints to describe the difference in object obtaining opportunities among buyers with different budget ranks. We evaluate allocation mechanisms not only from the perspective of efficiency and revenue, but also with the criterion of equality. As an application of this new evaluation criterion -- the equality measure, we study the vehicle license allocation problem in China, introduce a class of hybrid auction-lottery mechanisms, and evaluate China's vehicle license allocation in a unified framework from the criteria of efficiency, equality, and revenue.
... In one experiment, we made use of uniform price auctions (Evans et al 2009). Instructions were read aloud by a moderator and questions were strongly encouraged. ...
Many studies that use stated preference (SP) surveys to estimate the demand for private or public goods can be characterized as experiments, although they are not routinely labeled as such. This paper draws from the broader experimental economics literature to provide insights for SP practitioners and researchers, particularly as it pertains to survey development, mechanism design, external validity, data analysis, and the dissemination of findings. De nombreuses études dans lesquelles des enquêtes de préférences déclarées sont utilisées pour estimer la demande de biens publics ou privés peuvent être qualifiées d'expérimentales, bien que ce ne soit pas automatiquement le cas. Le présent article examine la vaste littérature sur l’économie expérimentale afin d'offrir aux concepteurs d'enquêtes de préférences déclarées et aux chercheurs des connaissances supplémentaires sur divers sujets tels que l’élaboration d'une enquête, la conception des mécanismes, la validité externe, l'analyse des données et la diffusion des résultats.
... They showed that if everybody has, ex ante, equal probability of accessing a capacity-constrained public good, the expected benefits of access are significantly reduced compared to efficient access. The literature following Mumy and Hanke (1975) focused primarily on congestion (Harrington 1988) and allocation by lotteries (Boyce 1994;Taylor, Tsui, and Zhu 2003;Evans, Vossler, and Flores 2009). The problem of allocation with poorly defined property rights and the concurrent absence of pricesorting mechanisms seemed to be of lesser concern. ...
Resources are often allocated without property rights and the attendant market exchanges. Households commonly encounter these situations—access to schools, on-street parking. Fishing firms typically exploit stocks in a limited-entry setting under input controls. Absent transferable rights and the sorting of marginal values induced by price mechanisms, it is critical to understand the rules governing access. We study allocation of harvest among fishing sectors in this second-best context and demonstrate that optimal allocation combines information on probabilities of access with the standard information in marginal value schedules. We illustrate our arguments with data from the Gulf of Maine.
This paper examines whether the ex post relative payoffs of peers as well as the size of the peer group impact an agent's willingness to take risks. For example, persons in a flood plain may be less likely to purchase flood insurance if their neighbors also refrain from purchasing. We generalize the Fehr‐Schmidt (1999) model to allow the intensity of the social preferences to vary with the size of the peer group. Our experiment tests whether subjects are more or less likely to choose a lottery over a fixed payment when others have been assigned either the same lottery or the fixed payment. Using both between and within subject designs, we find risk‐taking behaviour is not responsive to the risks faced by others regardless of the size of peer group.
This paper studies an auction‐lottery hybrid mechanism that is widely adopted in allocating new vehicle licenses in China. We characterize individuals' entry and bidding strategies in a symmetric Bayesian Nash equilibrium, structurally estimate individuals' value distribution from a dataset of Guangzhou program, and evaluate the performance of the mechanism. Based on the estimated distribution and counterfactual analysis, our study suggests that a hybrid mechanism preserves 83% efficiency and 52% revenue, while improves equity by 25 times comparing to a pure auction. We show that allowing auction losers to participate in the lottery can further enhance the performance.
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We study a pricing and allocation problem of a seller of multiple units of a homogeneous item, and present a semi-market mechanism in the form of an iterative ascending-bid auction. The auction elicits buyers' preferences over a set of options offered by the seller, and processes them with a random-priority assignment scheme to address buyers' "fairness" expectations. The auction's termination criterion is derived from a mixed-integer programming formulation of the preference-based capacity allocation problem. We show that the random priority- and preference-based assignment policy is a universally truthful mechanism which can also achieve a Pareto-efficient Nash equilibrium. Computational results demonstrate that the auction mechanism can extract a substantial portion of the centralized system's profit, indicating its effectiveness for a seller who needs to operate under the "fairness" constraint.
Equity-based incentive contracts provide managers with dual incentives, motivating both effort and fraud. We report the results from an experiment in which manager subjects make effort and fraud decisions that affect a firm’s value. The main treatment variable is the incentive contract, which can be of either the simple equity or stock option type. We find that both effort and fraud are increasing in a manager’s share of equity, and decreasing in the strike price of an option. Interestingly, the stock option contract induces relatively more fraud than the simple equity contract, even though the two induce the same effort.
We introduce two novel mechanisms for provision point public goods, motivated by the design of uniform price auctions: The uniform price auction mechanism (UPA) collects an endogenously determined uniform price from everyone offering at least that price, while the uniform price cap mechanism (UPC) collects the uniform price from everyone offering at least that price, plus the full offer of everyone offering less. UPC has the same undominated perfect equilibria as standard provision point (PPM) and proportional rebate (PR) mechanisms, and UPA a somewhat broader set. However, our mechanisms' different marginal penalty structures may facilitate equilibrium selection and lead to higher contributions and more frequent provision. Through laboratory experiments, using both homogeneous (symmetric) and heterogeneous induced values, we show our mechanisms improve upon PR and PPM: UPC generates higher aggregate contributions than PR and PPM, leading to higher provision rates than PPM; UPA attracts much higher contributions, although it provides less frequently. This ranking emerges because high offers are more common (especially among high value people in the heterogeneous environment) in the uniform price mechanisms, where higher offers only increase the payment when needed for provision.
This article establishes optimal pricing rules for rationing indivisible units of rival and otherwise nonexcludable goods by lottery or a hybrid of a lottery and outright sale by posted price. Given the distributional objective of maximizing expected consumer surplus, the solutions to unconstrained and constrained versions of the pricing problem may be expressed in classic inverse elasticity form, with the lottery price appearing as an entry fee, user fee or a combination of the two. Numerical analysis of a rich class of private value distributions indicates that sizable gains in expected consumer surplus can be realized over competitive pricing and zero pricing.
In theory, contingent fees can reduce the effects of informational asymmetries by allowing clients to screen low-quality attorneys who obtain smaller awards in expectation. We experimentally examine whether clients possess the sophistication necessary to design screening contracts and how contingent fee caps affect a client's ability to screen. When contingent fees are unrestricted, we find that most subjects are able to design contracts that screen low-quality attorneys, resulting in an increase in the quality of legal services. However, we find that contingent fee caps decrease the frequency of screening even if the cap is non-binding. Caps on contingent fees also reduce clients’ ability to extract surplus, allowing attorneys to earn greater profits.
The rights to use publicly-managed natural resources are sometimes distributed by lottery,and typically these rights are non-transferable. Prohibition of post-lottery permit transfers discourages applicants from entering the lottery solely for pro table permit sale, so only those who personally value the use of the resource apply. However, because permits are distributed randomly and trade is restricted, permits may not be used by those who value them most. We examine a possible rationale for restrictions on permit transfers based on the distribution of welfare across interest groups, and characterize the economic conditions under which post-lottery prohibitions on trade are likely to arise. We develop our model using the speci c case of the Four Rivers Lottery used to allocate rafting permits on four river sections in Idaho and Oregon.
We survey experimental research on multiunit auctions with an emphasis on topics that may be of a unifying interest to experimental, as well as theoretical and empirical economists. Topics include static and dynamic multiunit auctions; combinatorial auctions and efficient auction design; simultaneous and sequential auctions; bidder asymmetry and endogenous entry, and collusion in auctions. We also discuss behavioral regularities observed in multiunit auction experiments.
Increased competition in the health care sector has led hospitals and other health care institutions to experiment with new access allocation policies that move away from traditional expert based allocation of care to price-based priority access (i.e., the option to pay more for faster care). To date, little is known about individuals' attitude toward price-based priority access and the evaluation process underlying this attitude. This paper addresses the role of individuals' evaluations of collective health outcomes as an important driver of their attitude toward (price-based) allocation policies in health care.
This paper analyses, in a simple two-region model, the undertaking of noxious facilities when the central government has limited prerogatives. The central government decides whether to construct a noxious facility in one of the regions, and how to …nance it. We study this problem under both full and asymmetric information on the damage caused by the noxious facility in the host region. We particularly emphasize the role of the central government prerogatives on the optimal allocations. We …nally discuss our results with respect to the previous literature on NIMBY and argue that taking into account these limited prerogatives is indeed important.
valued because of an atavistic rivalry between the two countries in this respect. The Club Committee decided to have lots drawn for the tickets and to ask the winners to contribute DFL30 to the club funds for the purpose of buying a TV set for the club canteen. The six boys who had won the quiz, and who had already received personal presents, were not given priority in the distribution of the tickets; this decision was later reversed under heavy pressure amounting to, among other things, anonymous telephone threats to the club chairman. Many more illustrations could be given for the strong feelings of aversion that are often evoked by using lottery as an allocative mechanism. On the other hand, rational arguments in favour of lottery have been put forward. Elster (1989a) discusses three types of indeterminacy that might justify random choice between options. One is strict equioptimality, as in choosing between cans of Campbell's tomato soup. A second is equioptimality within the limit of what it pays to find out, that is, the case in which the cost of gathering more information would exceed the marginal utility of the superior option. The third is the incommensurability of options; one might say that, in this case, any investments into the choice procedure are fruitless a priori. The present analysis takes the contrast between aversion and argument as its point of departure. Its scope is allocative problems and particularly those situations in which some public authority distributes scarce indivisible goods among people, rather than problems of choice between goods from a private point of view, whether individual or institutional. In the context of allocation, the question about the feasibility of lottery may be analysed as follows: from a rational point of view, the efficiency of distributive mechanisms is at stake, as it is in other problems of rational choice. However, the interplay between the allocative authority, the target subject, and the general public or common interest introduces two further aspects of feasibility. One is justness, that is, the extent to which the mechanism is compatible with written and
This article reports 15 first-price auction experiments, each with four bidders, designed to test Cedric Smith' (1961) hypothesis that risk-neutral behavior can be induced in subjects' decisions by paying them in lotteries on money that are linear in the outcome probabilities. We choose the first-price auction environment because of its relatively high success in surviving a large number of tests, which contrasts with the widely documented tendency of subjects to violate the expected utility axioms in making choices among gambles. In the first five experiments, subjects were experienced in first-price auctions with monetary rewards. We prescreened these subjects for exceptionally high bidding consistency with the constant relative risk-averse model. The results unyielded only weak support for the risk-neutralizing procedure (3 of 10 risk-averse cases became risk-neutral, but only 1 in 8 that were retested continued to exhibit risk-neutral behavior). We recruited 16 new subjects with no previous experience for four lottery-only auctions. Eight of the 16 subjects bid as if risk-neutral, but in a retest of 12 subjects only 2 remained consistently risk-neutralized. Finally we recruited 12 inexperienced subjects, and each subject bid against 3 robot bidders whose bidding strategies were known to the human bidder. We use this procedure to control for Nash expectations. These 12 subjects were run under both monetary and lottery reward conditions. Two of the 12 subjects bid as if risk-neutral in the lottery auction, but both of these subjects had shown risk-neutral behavior with monetary rewards. In conclusion, we find very weak support for the risk-neutralizing procedure. We caution other researchers to run calibration tests of the procedure in the particular context they are studying to assess its reliability.
This paper estimates individual risk preferences based upon data that are generated by the same individuals acting in different institutions. The results show that the (estimated) numerical values of individuals' implied risk parameters are not stable within individuals across institutions. Furthermore, the ranking across subjects of the numerical values of individuals' implied risk parameters is not preserved across institutions. Copyright 2000 by Kluwer Academic Publishers
z-Tree (Zurich Toolbox for Ready-made Economic Experiments) is a software for developing and conducting economic experiments. The software is stable and allows programming almost any kind of experiments in a short time. In this article, I present the guiding principles behind the software design, its features, and its limitations. Copyright Economic Science Association 2007
Community standards of fairness for the setting of prices and wages were elicited by telephone surveys. In customer or labor markets it isacceptable for a firm to raise prices (or cut wages) when profits arethreatened, and to maintain prices when costs diminish. It is unfair toexploit shifts in demand by raising prices or cutting wages. Several market anomalies are explained by assuming that these standards of fairness influence the behavior of firms. Copyright 1986 by American Economic Association.
A menu of paired lottery choices is structured so that the crossover point to the high-risk lottery can be used to infer the degree of risk aversion. With normal laboratory payoffs of several dollars, most subjects are risk averse and few are risk loving. Scaling up all payoffs by factors of twenty, fifty, and ninety makes little difference when the high payoffs are hypothetical. In contrast, subjects become sharply more risk averse when the high payoffs are actually paid in cash. A hybrid "power/expo" utility function with increasing relative and decreasing absolute risk aversion nicely replicates the data patterns over this range of payoffs from several dollars to several hundred dollars.
This chapter discusses the certain salient themes of the limited dependent variable (LDV) literature. LDV's are usually explained in terms of some economic model or rationalizing scheme for which (1) their range is intrinsically a finite discrete set and any attempt to extend it to the real line not only does not lead to useful simplification but befouls any attempt to resolve the issues at hand and (2) even though their range may be the real line their behavior is conditioned on another process. Examples of the first type are the models of occupational choice, entry into labor force, entry into college upon high school graduation, the utilization of recreational facilities, the utilization of modes of transport, and childbearing. Examples of the latter are models of housing prices and wages in terms of the relevant characteristics of the housing unit or the individual—commonly referred to as “hedonic price determination.”
Within the expected-utility framework, the only explanation for risk aversion is that the utility function for wealth is concave: A person has lower marginal utility for additional wealth when she is wealthy than when she is poor. This paper provides a theorem showing that expected-utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes: Within expected-utility theory, for any concave utility function, even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes. Illustrative calibrations are provided. Keywords: Diminishing Marginal Utility, Expected Utility, Risk Aversion JEL Classifications: B49, D11, D81 Acknowledgments: Many people, including David Bowman, Colin Camerer, Eddie Dekel, Larry Epstein, Erik Eyster, Mitch Polinsky, Drazen Prelec, Richard Thaler, and Roberto Weber, as well as Andy Postlewaite and two anonymous referees, have provided useful feedback on this paper. I th...
We report on sealed-bid second-price auctions that we conducted on the Internet using subjects with substantial prior experience: they were highly experienced participants in eBay auctions. Unlike the novice bidders in previous (laboratory) experiments, the experienced bidders exhibited no greater tendency to overbid than to underbid. However, even subjects with substantial prior experience tended not to bid their values, suggesting that the non-optimal bidding of novice subjects is robust to substantial experience in non-experimental auctions. We found that auction revenue was not significantly different from the expected revenue the auction would generate if bidders bid their values. Auction efficiency, as measured by the percentage of surplus captured, was substantially lower in our SPAs than in previous laboratory experiments.
Using data from a 1992 survey of Maine hunters, we estimate the willingness to pay for a program that would eliminate the risk of non-participation in an otherwise lottery-rationed moose hunting system. We develop an empirical model to estimate the option price (OP) hunters have for eliminating this risk, based on survey data. We find an estimated OP to eliminate the non-participation risk associated with the lottery system of over $380. The estimated results are compared with the results of 12 years of management experience. We also provide a modest ex-post analysis and overview of an auction of a small number of licenses occurring since 1998. Based on the estimates from the model and survey data, we believe that moose management strategies in recent years would pass a benefit-cost test.
This paper is concerned with derivation of a non-cooperative equilibrium bid function for heterogeneous bidders in discriminative auctions.
This paper studies the efficiencies of the two most widely used non-price allocation mechanisms: lotteries and waiting-line auctions. As our analysis suggests, in addition to the fairness of the mechanism, the use of lotteries in lieu of waiting-line auctions can be also justified from an efficiency point of view. In particular, we show that the less dispersed consumers’ time valuations are, the more efficient is a lottery relative to a waiting-line auction. In addition, we identify four conditions under which a lottery dominates a waiting-line auction in expected social surplus preserving. Furthermore, the numerical simulations we conduct indicate that over a predominantly wide range of circumstances, a lottery is more socially efficient than a waiting-line auction as an allocative mechanism in the absence of a conventional price system.
We develop and implement a collocation method to solve for an equilibrium in the dynamic legislative bargaining game of Duggan and Kalandrakis (2008). We formulate the collocation equations in a quasi-discrete version of the model, and we show that the collocation equations are locally Lipchitz continuous and directionally differentiable. In numerical experiments, we successfully implement a globally convergent variant of Broyden's method on a preconditioned version of the collocation equations, and the method economizes on computation cost by more than 50% compared to the value iteration method. We rely on a continuity property of the equilibrium set to obtain increasingly precise approximations of solutions to the continuum model. We showcase these techniques with an illustration of the dynamic core convergence theorem of Duggan and Kalandrakis (2008) in a nine-player, two-dimensional model with negative quadratic preferences.
Revenue-equivalence of competitive and discriminatory formats is a major result for private-value multiunit auctions with risk-neutral bidders. Among the factors that may cause this result to break down, the most notorious ones are risk-aversion, value-affiliation, and endogenous bidder participation. Using data from competitive and discriminatory auctions undertaken in the Zambian foreign exchange market, the author analyzes revenue-equivalence and other bidding phenomena. The results indicate that (1) competitive auctions were revenue-superior due to higher participation; (2) high bidders adjusted with delay to an auction format change; and (3) a reservation bid was used as a policy instrument. Copyright 1993 by MIT Press.
In this article we use laboratory experiments to ask a fundamental question: Do individuals behave as if their risk preferences are stable across institutions? In particular, we study the decisions of cash-motivated subjects in the repeated play of three different institutions: a value elicitation procedure for the sale of a risky asset, an English clock auction for the sale of a risky asset, and a first-price auction for the purchase of a riskless asset. We first do a simple categorical comparison of each subject's risk preferences across tasks by comparing the individual's decisions with an expected value maximizer. All subjects acted as if they were risk-loving in the English clock auctions and risk-averse in the first-price auctions. In the Becker, Degroot, and Marschack procedure, behavior was split between risk-loving and risk-averse bidding. For each institution we also estimate an individual's risk coefficient. We test the hypotheses that for the same individuals the estimated risk coefficient across institutions is the same. We find that these estimates are statistically different.
Many authors have argued that lotteries are used to allocate resources because of the fairness of the mechanism. However, a number of historical examples suggest otherwise. Participation fees are almost always charged and they are often discriminatory. In addition, goods (or bads) allocated by lotteries are usually not transferable. Both lottery participation fees and restrictions on transferability reduce rent-seeking from speculators. Each feature increases the rents to the primary user groups relative to the rents attainable from alternative mechanisms such as auctions, queues, or merit allocations. Copyright 1994 by Oxford University Press.
This paper reports new data from both selling and buying versions of the Becker-DeGroot-Marschak (BDM) procedure. First, when using the selling version of BDM, the cross-sectional mean of CRRA risk preference parameter estimates shifts from a value consistent with “as if†risk-seeking behavior in the early baseline to a value closer to “as if†risk neutrality in the late baseline. Second, when using the buying version of BDM, the cross-sectional mean of CRRA risk preference parameter estimates does not appear to change over time in a statistically significant manner. The cross-sectional mean from the late baseline of the buying version of BDM is closer to “as if†risk neutrality and to the late baseline estimates from the selling version of BDM than it is to either early baseline estimates from the selling version of BDM or typical estimates from the first price auction. Use of dominated offers is correlated with deviations from “as if†risk neutrality; this suggests the possibility that the early deviations from “as if†risk neutrality reflect errors. Copyright Economic Science Association 2007
We design experiments to jointly elicit risk and time preferences for the adult Danish population. The experimental procedures build on laboratory experiments that have been evaluated using traditional subject pools. The field experiments utilize field sampling designs that we developed, and procedures that were chosen to be relatively transparent in the field with non-standard subject pools. Our overall design was also intended to be a general template for such field experiments in other countries. We examine the characterization of risk over a wider domain for each subject than previous experiments, allowing more precise estimates of risk attitudes. We also examine individual discount rates over six time horizons, as the first stage in a panel experiment in which we revisit subjects to test consistency and stability of responses over time. Risk and time preferences are heterogeneous, varying by observable individual characteristics. On a methodological level, we implement a refinement of existing procedures which elicits much more precise estimates, and also mitigates framing effects.
Consumers' risk preferences are often overlooked in studies of consumer demand for risky food. We find that risk preferences elicited through context-less lottery choices are significantly related to consumers' stated preferences for genetically modified (GM) food. These results suggest risk preferences elicited in the laboratory are not artificial in the sense that they appear to be related to the same risk preferences that govern other individual decisions such as food choice. Consistent with theoretical expectations, risk perceptions and risk preferences were found to be significant determinants of acceptance of GM food, which has important implications for explaining consumer behavior. Copyright 2005 American Agricultural Economics Association.
Expected utility maximizers bid according to dominant strategies in second price auctions for risky prizes, bids are independent of the number of other bidders or the reserve price, the optimal reserve price is independent of the number of bidders, and ascending bid and second price auctions generate the same expected revenue. If expected utility fails, none of these results remain true, and symmetric equilibria may not be unique. If fanning in and betweenness hold, uniquenes is restored, bids fall when the number of bidders or the reserve price increases and second price auctions generate higher bids than ascending bid auctions. Journal of Economic Literature Classification Numbers: D81, D44.
This study explores the ways in which information about other individual's action affects one's own behavior in a dictator game. The experimental design discriminates behaviorally between three possible effects of recipient's within-game reputation on the dictator's decision: Reputation causing indirect reciprocity, social influence, and identification. The separation of motives is an important step in trying to understand how impulses towards selfish or generous behavior arise. The statistical analysis of experimental data reveals that the reputation effects have a stronger impact on dictators' actions than the social influence and identification.
Does individual behavior in a laboratory setting provide a reliable indicator of behavior in a naturally occurring setting? We consider this general methodological question in the context of eliciting risk attitudes. The controls that are typically employed in laboratory settings, such as the use of abstract lotteries, could lead subjects to employ behavioral rules that differ from the ones they employ in the field. Because it is field behavior that we are interested in understanding, those controls might be a confound in themselves if they result in differences in behavior. We find that the use of artificial monetary prizes provides a reliable measure of risk attitudes when the natural counterpart outcome has minimal uncertainty, but that it can provide an unreliable measure when the natural counterpart outcome has background risk. Behavior tended to be moderately risk averse when artificial monetary prizes were used or when there was minimal uncertainty in the natural nonmonetary outcome, but subjects drawn from the same population were much more risk averse when their attitudes were elicited using the natural nonmonetary outcome that had some background risk. These results are consistent with conventional expected utility theory for the effects of background risk on attitudes to risk. Copyright The Econometric Society 2007.
I study a budget-constrained, private-valuation, sealed-bid sequential auction with two incompletely-informed, risk-neutral bidders in which the valuations and income may be non-monotonic functions of a bidder's type. Multiple equilibrium symmetric bidding functions may exist that differ in allocation, efficiency and revenue. The sequence of sale affects the competition for a good and therefore also affects revenue and the prices of each good in a systematic way that depends on the relationship among the valuations and incomes of bidders. The sequence of sale may affect prices and revenue even when the number of bidders is large relative to the number of goods. If a particular good, say [alpha], is allocated to a strong bidder independent of the sequence of sale, then auction revenue and the price of good [alpha] are higher when good [alpha] is sold first.
The symmetric equilibrium of third-price auctions is characterized. It makes a number of contrasting predictions relative to firms and second-price auctions: bids exceed private values, the marginal effects on bids of an increase in private values is greater than one, increasing numbers of bidders reduces bids, and risk aversion requires bidding below the risk neutral Nash equilibrium. In the experiment, bidders do not always satisfy the point predictions of the theory. However, the game theoretic models correctly anticipate, at least directionally, the important effects of the price rule changes. Copyright 1993 by Royal Economic Society.
Evidence shows that real-effort investments can affect bilateral bargaining outcomes. This paper investigates whether similar investments can inhibit equilibrium convergence of experimental markets. In one treatment, sellers’ relative effort affects the allocation of production costs, but a random productivity shock ensures that the allocation is not necessarily equitable. In another treatment, sellers’ effort increases the buyers’ valuation of a good. We find that effort investments have a short-lived impact on trading behavior when sellers’ effort benefits buyers, but no effect when effort determines cost allocation. Efficiency rates are high and do not differ across treatments.
Why Not Let Immigrants Pay for Speedy Entry? Business Week Risk preference instability across institutions: a dilemma
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A New Panama Canal. Wired Magazine
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Immigration Reform — Posner comment The Becker–Posner Blog http://www.becker-posner-blog.com/archives NRHA Ocean View Auction and Lottery's 'Roof Raising' Results: Twenty Lots Gross Nearly $1.5 Million in Sales in Little Over an Hour
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Drilling for dollars: the new and improved federal oil lease program
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Alaska State Land Offering Auction #444
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Reforming Immigration: Helping Meet America's Need for a Skilled Workforce
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Auction and bidding games. Recent Advances in Game Theory: Papers delivered at a meeting of the Princeton University Conference
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