A Toolbox for Economic Design

by Diamantaras, Dimitrios; Cardamone, Emina Imsirovic I.; Campbell, Karen A. Campbell; Deacle, Scott; Delgado, Lisa A. A.

• ISBN13: 9780230610606
• ISBN10: 0230610609
• Edition: 1st
• Format: Hardcover
• Copyright: 2009-03-15
• Publisher: Palgrave Macmillan

Summary

This book combines economic theory and design to create tools that economists can use to apply in social, political and institutional application. This book seeks to provide the necessary stepping stones in order to facilitate the diffusion and adoption of this powerful tool for studying incentive structures in economics. The book presents a number of examples, both theoretical and real-life. It also has a chapter that samples the literature that tests mechanisms away from the blackboard, in laboratories and the real world.This book provides readers (students and applied economists) with the tools to design the rules of economics to harness the power of incentives.

Author Biography

Dimitrios Diamantaras is an associate professor at Temple University.

Table of Contents

List of Figures	p. vii
List of Tables	p. viii
Preface	p. ix
Acknowledgments	p. xi
Introduction	p. 1
A Story from Ancient Athens	p. 1
Institutions and Economics	p. 2
Getting the Big Picture	p. 4
Example: An Auction	p. 7
A Taste of Social Choice Theory	p. 8
Arrow's Impossibility Theorem	p. 9
Social Choice Functions	p. 14
Economic Domain	p. 18
Exchange Economies	p. 18
Social Choice Correspondences on the Exchange Economy Domain	p. 20
The Pareto Social Choice Correspondence	p. 21
The Individually Rational Social Choice Correspondence	p. 23
The Core Social Choice Correspondence	p. 23
The No-Envy Social Choice Correspondence	p. 25
Combinations of the Previous Social Choice Correspondences	p. 25
The Walrasian Social Choice Correspondence	p. 26
Quasilinear Preferences and Their Uses	p. 27
Appendix: Proofs	p. 29
Arrow's Impossibility Theorem	p. 29
Gibbard-Satterthwaite Theorem	p. 33
Exercises	p. 36
Dominant Strategy Implementation	p. 38
Definitions	p. 38
Revelation Principle	p. 41
Restricting Domains: Single-Peaked Preferences	p. 43
Restricted Domains: Quasilinear Domains and Groves Mechanisms	p. 45
Balance Problem	p. 52
Voluntary Participation Problem	p. 53
The Vickrey Auction	p. 53
Exercises	p. 55
Implementation in Nash Equilibria	p. 58
A Quick Lesson on Nash Equilibrium	p. 58
Nash Equilibrium in Mixed Strategies	p. 61
Nash Equilibrium in Implementation	p. 62
Strategy Space Reduction	p. 72
Two Person Cases	p. 75
Exercises	p. 78
Bayesian Equilibrium and Mechanisms	p. 81
Preliminary: How to Represent Information	p. 81
Bayesian Equilibrium	p. 83
The Bayesian Revelation Principle	p. 86
The Mechanism of d'Aspremont and Gerard-Varet and of Arrow	p. 88
Voluntary Participation	p. 91
Optimal Auctions	p. 94
Bilateral Trading	p. 100
Exercises	p. 105
Refined Nash Implementation	p. 107
Implementation in Subgame Perfect Equilibrium	p. 107
Subgame Perfect Implementation in Quasilinear Environments	p. 112
Implementation Using Undominated Strategies	p. 115
Double Implementation	p. 121
Definitions	p. 121
Ratio Correspondence	p. 123
Virtual Nash Implementation	p. 126
Applications	p. 132
Manipulation-Resistant Online Reputation Systems	p. 132
Walrasian Implementation via Market Games	p. 136
Implementing the Lindahl Social Choice Correspondence	p. 139
Implementing Fair Allocations	p. 142
Application to Negative Externality Problems: Pollution Abatement	p. 147
A Nearly Efficient Mutual Insurance Mechanism	p. 150
Financing the Athenian Fleet	p. 153
Bayesian Implementation	p. 158
Example of Multiple Bayesian Equilibria	p. 158
Bayesian Implementation and Bayesian Monotonicity	p. 160
Restrictiveness of Bayesian Monotonicity	p. 166
Virtual Bayesian Implementation	p. 169
Further Topics in Mechanism Design	p. 172
Endogenous Mechanisms	p. 172
Notation and Definitions	p. 174
An Application: Public Goods	p. 179
Positive Results for Endogenous Games with 3 or More Players	p. 181
Overcoming Incentive Constraints by Linking Decisions	p. 183
Notation and Definitions	p. 185
Results	p. 187
Robust Mechanism Design	p. 189
Notation and Definitions	p. 190
Results	p. 192
The Limits of Ex Post Implementation	p. 195
Notation and a Result	p. 195
An Illustration of the Geometric Condition	p. 197
Exercises	p. 199
Matching Models	p. 202
What Is Matching?	p. 202
Notation and Definitions	p. 203
Two-Sided Matching	p. 204
One-to-One Matching	p. 205
Many-to-One Matching	p. 212
One-Sided Matching	p. 221
The Shapley and Scarf House Market	p. 221
House Allocation Problems	p. 223
The Kidney Exchange Problem	p. 224
Exercises	p. 226
Empirical Evidence on Mechanisms	p. 228
Introduction	p. 228
Voluntary Contribution Mechanisms for Public Goods	p. 229
Tests of Incentive Compatibility	p. 237
Research on Mechanism Dynamics	p. 239
Tests of Implementation Concepts	p. 241
Applied Economic Design: Notes from the Field	p. 244
Conclusion	p. 250
Mathematics Review and More on Economic Domains	p. 254
Sets, Correspondences, Functions, Intervals	p. 254
Derivatives and Related Notation	p. 256
Elements of Mathematical Optimization	p. 258
Envelope Theorem	p. 259
The Edgeworth Box	p. 260
Public Good Economies	p. 261
The Simplest Public Project Model	p. 261
Public Goods Models	p. 261
Social Choice Correspondences	p. 262
Pareto Social Choice Correspondences	p. 263
Lindahl and Constrained Lindahl Social Choice Correspondences	p. 264
Ratio Social Choice Correspondence	p. 270
Exercises	p. 275
Notation	p. 276
Bibliography	p. 278
Index	p. 288
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