Choosing Wisely: A Multibidding Approach

Abstract

Reaching decisions about the location of noxious facilities, such as dump sites, environmentally hazardous plants, nuclear power generators and the like, is a highly contentious issue. For instance, in February 2000, the U.S. Senate decided that nationwide nuclear waste would be shipped to the Yucca mountain site in Nevada (conditional to it being approved as a high-level nuclear waste repository). Despite the attractive compensation package, the State of Nevada voiced vehement opposition. President Clinton vetoed the bill, and in May 2000 the Senate failed to overturn it. As such, the major problem facing the U.S. nuclear industry on where to site a high-level radioactive waste repository remains virtually unresolved. Neither are decisions about the location of desirable events easily solvable. Every two years, the International Olympic Committee selects hosts for the summer and winter games, a procedure that is constantly under review and revision in order to bring about the “best possible” outcome. Until about a year ago, the decision was made by a vote based on bids and plans submitted by candidate cities. However, the recent controversy surrounding the choice of Salt Lake City to host the 2002 winter games culminated in the design of a new procedure for choosing the host of the 2006 winter games. This procedure called for the selection of two finalist cities (in this case, Turin and Sion), immediately after which the host was selected by secret ballot (in this case, Turin). Another similar issue is currently the subject of heated debate in Spain. The Spanish government, both on the national and local level, has recently been discussing various possible projects for transferring water from rivers in the north of Spain to the arid southern regions. The parties involved have conflicting interests with regard to several aspects of the projects proposed. Particularly, the water-rich regions are hesitant to give up parts of their water resources. The parties involved have still not agreed upon the choice of a transport mode or the size of the transfer payments that would compensate the localities that are relinquishing part of the water supply. These and several other cases belong to a class of problems in which a group of agents has to choose one out of several projects. A project is efficient if it maximizes the aggregate welfare of the group members. Reaching an efficient outcome is trivial when the designer has all the relevant information. However, it is often the case that the parties concerned possess much more information than the designer. Hence, the designer faces a nontrivial problem if she wishes to optimally choose one of the projects. Moreover, from a normative point of view, even if the designer has all the information, it is easier to justify the use of a fixed procedure to reach a decision than to modify the procedure for various cases in light of information disclosed or already available to the designer. Several well-known methods are available for the problem of choosing one out of a set of alternatives. One class of methods consists of various voting schemes, such as majority voting or the Borda rule. The outcomes generated by these methods need not be efficient due to strategic behavior on the part of the agents. Another class of methods consists of VickreyClarke-Groves mechanisms. For this class, “truthtelling” is a dominant strategy that always results in the choice of an efficient alternative. However, these mechanisms are not budgetbalanced and the payments collected from the * Perez-Castrillo: Department of Economics & CODE, Universitat Autonoma de Barcelona, 08193 Bellatera (Barcelona), Spain; Wettstein: Department of Economics, BenGurion University of the Negev, Monaster Center for Economic Research, Beer-Sheva 84105, Israel. We thank Herve Moulin for his helpful suggestions; Suresh Mutuswami who encouraged us to check for strong Nash equilibria, and Francis Bloch, Mark Gradstein, Moshe Justman, Jordi Masso, and two anonymous referees for their useful comments. Perez-Castrillo gratefully acknowledges financial support from BEC2000-0172 and 2000SGR-00054.