Incentive Compatible Mechanism Research Articles

Reconnecting the Dots for the Payment Service Directive 2 - Compatible Asian Financial Network

Unlike the popular belief, digital transformation mainly gets stymied by legal and regulatory issues related with legacy institutions in Asia rather than technical difficulties. The real challenges triggered by the PSD2 (Payment Services Directive 2) are how the region would overcome the overly fragmented, centralized, and hierarchical legacy framework to allow necessary changes to respond to the digital single market initiatives as promulgated by the European counterpart. The PSD2 is expected to bring about substantial changes in the payment ecosystem by allowing payment service providers to access customers’ accounts and transactions information via API that have been traditionally controlled by banks. This paper suggests an incentive-compatible mechanism design for open collaboration among legacy institutions in the region to help them adapt to the PSD2. As evidenced by case studies in Korea, the Asian equivalent of PSD2 can be implemented and further expanded to create region-wide PCS (payment-clearing-settlement) network by reconnecting the dots of legacy infrastructures. These decentralized, diverse, small payment networks can be further combined with the expanded RTGS-CDS platform to evolve into the next phase of Asian Financial Network.

Monotonicity in optimal mechanisms in general quasi-linear environments with a continuum of types

This paper provides conditions for the existence of optimal mechanism, in which the assignment rule takes the monotonic form and is determined independently of the transfer rule, in a principal-agent problem with a general quasi-linear environment. It is based on a complete characterization result of incentive-compatible mechanisms by monotonicity, envelope, and lower boundary individual rationality conditions. In particular, we present a general result for such an existence, which is also applicable to the scenarios without linear payoffs or regularity (lattice-related) conditions.

Full implementation of social choice functions in dominant strategies

We consider the classical mechanism design problem of fully implementing social choice functions in dominant strategies in settings where monetary payments are allowed and the utility functions are quasi-linear. We consider both the general question of full implementation by indirect mechanisms and the special case of full implementation by incentive compatible direct revelation mechanisms. For the general case of full implementation by indirect mechanisms, we prove that one can restrict attention to incentive compatible augmented revelation mechanisms, in which the type space of each agent is a subset of the set of her possible bids and truthful reporting is a dominant strategy equilibrium. When the type spaces of the agents are finite, we give a complete characterization of the set of social choice functions that can be fully implemented in dominant strategies. For the case that one restricts to incentive compatible direct revelation mechanisms, we show that an adaption of the well-known negative cycle criterion for partial implementability also characterizes the social choice functions that are fully implementable.

Voting with public information

We study the effect of public information on collective decision-making in committees, where members can have both common and conflicting interests. In the presence of public information, the simple and efficient vote-your-signal strategy profile no longer constitutes an equilibrium under the commonly-used simultaneous voting rules, while the intuitive but inefficient follow-the-expert strategy profile almost always does. Although more information may be aggregated if agents are able to coordinate on more sophisticated equilibria, inefficiency can persist even in large elections if the provision of public information introduces general correlation between the signals observed by the agents. We propose simple voting procedures that can indirectly implement the outcomes of the optimal ex post incentive compatible mechanisms with public information. Our voting procedures also have additional advantages when there is a concern for strategic disclosure of public information.

Some institutional design for shareholder socialism

In times of a declining labour share and an intense international tax competition, some form of market socialism may contribute to hold income inequality in check. However, the concept of market socialism involves three major pitfalls: cronyism, technological stagnation, and power concentration. These pitfalls could be avoided by an appropriate institutional design that includes the combination of public ownership with an extensive use of the stock market, an incentive-compatible mechanism for the takeover of private firms, and participatory democracy.

Consumers\u2019 willingness to pay for natural food: evidence from an artefactual field experiment

Among foods with credence attributes, food with “natural” components have received in the last years particular attention by consumers. This study applies the BDM incentive compatible mechanism to explore young (18–35 years old) consumers’ interest and willingness to pay for chewing gums having the natural attribute. Our analysis shows that over 68% of consumers are interested in the natural attribute and are willing to pay a price premium. We also find that consumers’ higher age and interest in the environment have significant impacts on consumers’ preferences for the natural attribute.

Designing efficient and incentive compatible mechanisms is almost impossible in quasi-linear environments

In quasi-linear environments, classic theories state that it is possible to design efficient and incentive-compatible mechanisms, such as Vickrey, Clarke and Groves (VCG) mechanisms. However, once financial constraints are taken into account, we find that almost no financial constraint is compatible with efficiency and individual incentives over unrestricted domains and some restricted domains. Therefore, our results imply that even in quasi-linear environments, it is still impossible to design an efficient and incentive compatible mechanism because of financial constraints.

Does death make us all equal? Materialism and status-seeking under Mortality Salience

The thought of one’s own death induces anxiety and threatens self-esteem. According to Terror Management Theory (TMT), to reduce this existential threat individuals (1) adhere more strongly to their cultural worldview and (2) embrace behaviors aimed at boosting self-esteem. Previous psychological studies of TMT do not generally rely on incentive-compatible mechanisms. However, economic incentives are strong drivers of individuals’ behavior and need to be studied along with intrinsic motivations. Here, we combined—for the first time—a real effort task with psychological priming techniques. Crucially, we adopted a “flat-wage” scheme to investigate whether individuals primed with death-related thoughts, i.e., a Mortality Salience (MS) induction, increase their individual productivity more than individuals primed with a control topic (Music salience induction). We also investigated whether the effect of MS on performance is mainly driven by the quest for self-esteem vs. status-seeking, providing either private or public feedback on performance. Participants generally showed lower performance levels in the MS compared to the control condition. Public feedback bolstered performance, but its effect was milder under MS. These results suggest that in the absence of economic incentives to perform, individuals do not generally increase effort and productivity; they rather adhere more tightly to cultural (materialistic) worldviews, avoiding effort that is not compensated. The effect of MS, indeed, was strongly influenced by individual materialism.

Forward-looking and Incentive-compatible Operational Risk Capital Framework

This paper proposes an alternative framework to set banks’ operational risk capital, which allows for forward-looking assessments and limits gaming opportunities by relying on an incentive-compatible mechanism. This approach would improve upon the vulnerability to gaming of the AMA and the lack of risk-sensitivity of BCBS’s new standardized approach for operational risk.

Consumer Reactions to Tax Avoidance Evidence From the United States and Germany

This research investigates the impact of corporate tax strategies (i.e., tax avoidance and non-avoidance) on consumers’ corporate social responsibility (CSR) perceptions, willingness to pay (WTP), and attitude toward the firm in two laboratory experiments (n = 409) in the United States and Germany. Using the Becker-DeGroot-Marshak incentive-compatible mechanism, which avoids a social desirability bias found in prior research, our results indicate only a minor indirect effect of corporate tax strategies on WTP by way of the mediator CSR perceptions. However, we find a strong effect on attitude toward the firm again mostly mediated by CSR perceptions. In contrast to German consumers, U.S. consumers’ CSR perceptions of tax avoidance are independent of whether a strategy is likely accepted by the tax authorities. Overall, we conclude that CSR perceptions are highly relevant when it comes to consumer responses to tax avoidance.

Robust Mobile Crowd Sensing: When Deep Learning Meets Edge Computing

The emergence of MCS technologies provides a cost-efficient solution to accommodate large-scale sensing tasks. However, despite the potential benefits of MCS, there are several critical issues that remain to be solved, such as lack of incentive-compatible mechanisms for recruiting participants, lack of data validation, and high traffic load and latency. This motivates us to develop robust mobile crowd sensing (RMCS), a framework that integrates deep learning based data validation and edge computing based local processing. First, we present a comprehensive state-of-the-art literature review. Then, the conceptual design architecture of RMCS and practical implementations are described in detail. Next, a case study of smart transportation is provided to demonstrate the feasibility of the proposed RMCS framework. Finally, we identify several open issues and conclude the article.

Incentive-Compatible Mechanisms for Norm Monitoring in Open Multi-Agent Systems


 
 
 We consider the problem of detecting norm violations in open multi-agent systems (MAS). We show how, using ideas from scrip systems, we can design mechanisms where the agents comprising the MAS are incentivised to monitor the actions of other agents for norm violations. The cost of providing the incentives is not borne by the MAS and does not come from fines charged for norm violations (fines may be impossible to levy in a system where agents are free to leave and rejoin again under a different identity). Instead, monitoring incentives come from (scrip) fees for accessing the services provided by the MAS. In some cases, perfect monitoring (and hence enforcement) can be achieved: no norms will be violated in equilibrium. In other cases, we show that, while it is impossible to achieve perfect enforcement, we can get arbitrarily close; we can make the probability of a norm violation in equilibrium arbitrarily small. We show using simulations that our theoretical results, which apply to systems with a large number of agents, hold for multi-agent systems with as few as 1000 agents–the system rapidly converges to the steady-state distribution of scrip tokens necessary to ensure monitoring and then remains close to the steady state.
 
 

Competing mechanisms with multi-unit consumer demand

The competing mechanisms literature is extended to a market setting in which firms have fixed capacity, and there is a continuum of consumers who desire multiple units and can only purchase from one firm. Firms choose incentive compatible mechanisms in which consumers report their utility types; consumption of the good and payments of the numeraire are continuous functions of the reports. Uniform price auctions with reserve prices, reinterpreted as direct mechanisms, are not consistent with equilibrium. However, modified auctions without reserve prices but with type-specific entry fees do constitute an equilibrium of the competing mechanisms game under additional regularity assumptions. When all firms announce fixed prices at the perfectly competitive level, this profile also constitutes an equilibrium of the competing mechanisms game.

Efficient implementation with interdependent valuations and maxmin agents

We consider a single object allocation problem with multidimensional signals and interdependent valuations. When agents' signals are statistically independent, Jehiel and Moldovanu (2001) show that efficient and Bayesian incentive compatible mechanisms generally do not exist. In this paper, we extend the standard model to accommodate maxmin agents and obtain necessary as well as sufficient conditions under which efficient allocations can be implemented. In particular, we derive a condition that quantifies the amount of ambiguity necessary for efficient implementation. We further show that under some natural assumptions on the preferences, this necessary amount of ambiguity becomes sufficient. Finally, we provide a definition of informational size such that given any nontrivial amount of ambiguity, efficient allocations can be implemented if agents are sufficiently informationally small.

Average-Case Approximation Ratio of Scheduling Without Payments

Apart from the principles and methodologies inherited from Economics and Game Theory, the studies in Algorithmic Mechanism Design typically employ the worst-case analysis and approximation schemes of Theoretical Computer Science. For instance, the approximation ratio, which is the canonical measure of evaluating how well an incentive-compatible mechanism approximately optimizes the objective, is defined in the worst-case sense. It compares the performance of the optimal mechanism against the performance of a truthful mechanism, for all possible inputs. In this paper, we take the average-case analysis approach, and tackle one of the primary motivating problems in Algorithmic Mechanism Design -- the scheduling problem [Nisan and Ronen 1999]. One version of this problem which includes a verification component is studied by [Koutsoupias 2014]. It was shown that the problem has a tight approximation ratio bound of (n+1)/2 for the single-task setting, where n is the number of machines. We show, however, when the costs of the machines to executing the task follow any independent and identical distribution, the average-case approximation ratio of the mechanism given in [Koutsoupias 2014] is upper bounded by a constant. This positive result asymptotically separates the average-case ratio from the worst-case ratio, and indicates that the optimal mechanism for the problem actually works well on average, although in the worst-case the expected cost of the mechanism is Theta(n) times that of the optimal cost.

Setting lower bounds on truthfulness

This paper presents inapproximability results for paradigmatic multi-dimensional truthful mechanism design problems.We first show a lower bound of 2−1n for the scheduling problem with n unrelated machines (formulated as a mechanism design problem in the seminal paper of Nisan and Ronen on Algorithmic Mechanism Design). Our lower bound applies to universally-truthful randomized mechanisms, regardless of any computational assumptions on the running time of these mechanisms. Moreover, it holds even for the wider class of truthfulness-in-expectation mechanisms.We then turn to Bayesian settings and show a lower bound of 1.2 for Bayesian Incentive-Compatible (BIC) mechanisms. No lower bounds for truthful mechanisms in multi-dimensional settings which incorporate randomness were previously known.Next, we define the workload-minimization problem in networks. We prove lower bounds for the inter-domain routing setting presented by Feigenbaum, Papadimitriou, Sami, and Shenker.Finally, we prove lower bounds for Max–Min fairness, Min–Max fairness, and envy minimization.

Study on Regional Water Resources Allocation Efficiency Based on Networking and Joint Scheduling of Reservoir Groups

The effect of reservoir group networking and joint scheduling on the efficiency of regional water resources allocation is studied in the paper and demonstrated by case analysis of two engineering projects in the counties of Zhejiang Province. The efficiency of water resources allocation involves both engineering and economic aspects, and its improvement is the result of the interaction between institutions and technologies. The efficiency of networking and joint scheduling of reservoir groups is obvious, as proved by the physical network created by joint scheduling, the internal incentive mechanism generated by water right transactions, as well as the networking and joint scheduling of agricultural irrigation, urban water supply and ecological water use. This efficiency mainly comes from the accumulation of reservoir resources and the rational utilization of flood resources brought by networking and joint scheduling. It would be an important model for the future development of regional water resources optimization to network and jointly operate reservoir groups. In essence, the networking and joint scheduling of a reservoir group involve the optimal allocation and operation of multi-source water resources for multi-users. The scheduling diagram can be regarded as the combination of diversion and water supply dispatch of each member reservoir, forming the network structure, realizing the joint operation of regional water resources, and finally improving the efficiency of water resources allocation at different stages in different regions. The main body of the reservoir networking and joint scheduling, the government departments, carry out planned dispatching of reservoirs only with obtaining certain amount of information. It is therefore necessary to establish an incentive compatibility mechanism to overcome such defects as information lag and asymmetry, in networking and operating reservoir groups.

Direct incentive-compatible mechanism for innovator-investor bargain in an innovation investment system

The functioning of the system of innovation investment, where an objective evaluation of an investment project containing new knowledge is impossible both for the investor and the innovator, currently is a matter of great interest. While for traditional industries, the use of statistical data is a satisfactory approach to the problem of uncertainty, for innovation projects this method isn’t applicable due to the natural absence of a valid statistical base. The practice shows that the empirical mechanisms used for innovation projects are rarely used for investing in traditional industries and vice versa. In this connection, there arises the problem of development an effective mechanism for financing innovation projects. We developed such a mechanism for the innovator-investor system in the form of a Bayesian non-cooperative repeating game with recalculated payments. The equilibrium parameters for any period of the given game are obtained. It is shown that, depending on the a priori estimates of the type of project, four different equilibria are possible in any particular period of that game. Therefore, using the strategy of adjusting a priori estimates of the investor and innovator on the basis of the Regret Matching rule, equilibrium for this finite Bayesian game is obtained.

Motives and Giving Norms Behind Remittances: The Case of Filipino Overseas Workers and their Recipient Households

The literature has focused on motives to explain remittance behavior. But as nonanonymous transfers, remittances are apt to be influenced by giving norms as well. We formulate an empirical specification that takes account of remittance motives involving workerhousehold pairs. We find that altruism dominates the exchange motive among overseas workers who are likely to be the primary breadwinners of their recipient households. We also find that, in the subsample in which overseas workers are likely to be secondary breadwinners, (a)household labor income is an endogenous explanatory variable and(b) the error covariance of the householdincomeandremittanceselectionequationsispositive.Apossiblereasonfor(a)isthat secondarybreadwinnersusehouseholdincomeasanimperfectsignalofopportunitycostorto detectunobservedeffort,i.e.,moralhazard,ingeneratingincome.Asfor(b),wesurmisethatit indicates the presence of incentivecompatible mechanisms against moral hazard. On giving norms,wefindthat,insamplesthatincludeoverseasworkerswhoaresecondarybreadwinners, remittance amounts are afflicted with negative selectivity. We present evidence that this is consistentwithFilipinogivingpractices,inwhicheveryonegivesbutinmodestamounts.

Forward-looking and incentive-compatible operational risk capital framework

The Advanced Measurement Approach (AMA) to operational risk capital is vulnerable to gaming, complex, and lacks comparability. The Standardized Measurement Approach (SMA) to operational risk capital lacks risk sensitivity and is unlikely to be appropriately conservative for US banks. An alternative framework is proposed that addresses the weaknesses of these approaches by relying on an incentive-compatible mechanism to elicit forward-looking projections of loss exposure.