Incentive Compatible Mechanism Research Articles

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.

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.

College Admission with Multidimensional Privileges: The Brazilian Affirmative Action Case

In 2012 Brazilian public universities were mandated to use affirmative action policies for candidates from racial and income minorities. We show that the policy makes the students' affirmative action status a strategic choice, and may reject high-achieving minority students while admitting low-achieving majority students. Empirical data shows evidence consistent with this type of unfairness in more than 49% of the programs. We propose a selection criterion and an incentive-compatible mechanism that, for a wider range of similar problems and the one in Brazil in particular, removes any gain from strategizing over the privileges claimed and is fair.

On the equivalence of Bayesian and deterministic dominant strategy implementation

In a symmetric single object allocation mechanism with n agents, we identify a necessary and sufficient condition for the existence of an equivalent deterministic dominant strategy incentive compatible mechanism for a given Bayesian incentive compatible mechanism.

The Performance of Deferred-Acceptance Auctions

Deferred-acceptance auctions are mechanisms whose allocation rule can be implemented using an adaptive reverse greedy algorithm. Milgrom and Segal recently introduced these auctions and proved that they satisfy remarkable incentive guarantees: in addition to being dominant strategy and incentive compatible, they are weakly group-strategyproof and can be implemented by ascending-clock auctions. Neither forward greedy mechanisms nor the VCG mechanism generally possess any of these additional incentive properties. The goal of this paper is to initiate the study of deferred-acceptance auctions from an approximation standpoint. We study what fraction of the optimal social welfare can be guaranteed by these auctions in two canonical problems, knapsack auctions and combinatorial auctions with single-minded bidders. For knapsack auctions, we prove a separation between deferred-acceptance auctions and arbitrary dominant-strategy incentive-compatible mechanisms. For combinatorial auctions with single-minded bidders, we design novel polynomial-time mechanisms that achieve the best of both worlds: the incentive guarantees of a deferred-acceptance auction, and approximation guarantees close to the best possible.

Pricing mechanisms in the online Peer-to-Peer lending market

This paper sheds light on the role that pricing plays in the loan bidding process of different platforms.This paper analyses the reasons for the differentiation of pricing mechanisms in the P2P market.This paper extends studies on the classification of pricing and bidding behaviour.This paper shows the BPM and the PPM provide incentives for lenders in the same settings. We discuss different pricing mechanisms in the online peer-to-peer lending market, including the borrower pricing mechanism (BPM), auction pricing mechanism (APM) and platform pricing mechanism (PPM), and analyse the pricing differences among them. First, different pricing models can be constructed to demonstrate the incentive compatibility of the different pricing mechanisms. We then further describe the equilibrium of the different pricing mechanisms and analyse the action strategies of borrowers and lenders. The results show that the BPM and PPM are incentive-compatible mechanisms as long as the loan is profitablethat is, each lender reports her own real type. However, the APM is not an incentive-compatible mechanism. Further, different types of BPMs or PPMs can be derived, and each lenders best response strategy will vary depending on the types of risk preferences in the different pricing mechanisms. Specifically, when lenders are risk averse, they will choose to bid the first time and exhaust their budget quota; when lenders are risk seeking, they will choose to bid late and exhaust their budget quota.

Incentive compatible mechanisms for scheduling two-parameter job agents on parallel identical machines to minimize the weighted number of late jobs

We consider the problem of designing polynomial time truthful mechanisms for machine scheduling problems with parallel identical machines where some of the jobs’ characteristics are private information of their respective owners and a central decision maker is in charge of computing the schedule. We study a two-parameter setting, where weights and due dates are private information while processing times are publicly known. The global objective is to minimize the sum of the weights of those jobs that are completed after their due dates. We derive a set of properties that is equivalent to the well known condition of cycle monotonicity, which is a general condition for truthful mechanisms in non-convex valuation function domains. Our results utilize knowledge about the underlying scheduling problem, so that the resulting properties are easier to implement and verify than the general condition of cycle monotonicity. We illustrate the use of our results by analyzing an example algorithm that has recently been proposed in the literature for the case of one machine.

Bernoulli factories and black-box reductions in mechanism design

In this letter, we report on our work providing a polynomial time reduction from Bayesian incentive compatible mechanism design to Bayesian algorithm design for welfare maximization problems. Unlike prior results, our reduction achieves exact incentive compatibility for problems with multidimensional and continuous type spaces.

Relative Privacy Valuations Under Varying Disclosure Characteristics

Our study investigates relative changes to the value individuals place on the disclosure of their private information. We use an incentive compatible mechanism to capture an individual’s willingness-to-accept (WTA) for a privacy disclosure in three randomized experiments. Characteristics of the required privacy disclosures are manipulated by altering information context, intended secondary use of the disclosed private information, and the requirement to disclose personally identifying information. We consistently find across the experiments that the information context influences the relative value of a disclosure but we observe null effects for external secondary use and the inclusion of identifying information. We increase the saliency of the privacy disclosure characteristics in the second experiment, which is found to increase participants’ average WTA but does not change relative values across the varying disclosure characteristics. In the third experiment, we train participants on the potential consequences of disclosing private information, which does not increase participants WTA beyond simply increasing the saliency of the privacy factors in a disclosure. Training participants of the consequences also does not influence the relative value of privacy disclosures across the varying disclosure characteristics. However, through a post-experiment survey we find that participants do acknowledge the increased risk introduced through external secondary use and providing identifying information. Additionally, we find that the participants’ internet privacy concerns increase when they are trained on the consequences of disclosing private information online. These results provide a unique perspective on privacy valuations. They fill a gap in the literature by clarifying privacy factors that influence the value of a multidimensional disclosure and provide further evidence of the privacy paradox, where consumers claim a desire for privacy but their economic actions suggest otherwise.

A simple budget-balanced mechanism

In the private values single object auction model, we construct a satisfactory mechanism—a dominant strategy incentive compatible and budget-balanced mechanism satisfying equal treatment of equals. Our mechanism allocates the object with positive probability to only those agents who have the highest value and satisfies ex-post individual rationality. This probability is at least $$(1-\frac{2}{n})$$ , where n is the number of agents. Hence, our mechanism converges to efficiency at a linear rate as the number of agents grow. Our mechanism has a simple interpretation: a fixed allocation probability is allocated using a second-price Vickrey auction whose revenue is redistributed among all the agents in a simple way. We show that our mechanism maximizes utilitarian welfare among all satisfactory mechanisms that allocate the object only to the highest-valued agents.

On the efficiency of long intermediation chains

Abstract Intermediation chains represent a common pattern of trade in over-the-counter markets. We study a classic problem impeding trade in these markets: an agent uses his market power to inefficiently screen a privately informed counterparty. We show that, generically, if efficient trade is implementable via any incentive-compatible mechanism, it is also implementable via a trading network that takes the form of a sufficiently long intermediation chain. We characterize information sets of intermediaries that ensure this striking result. Sparse trading networks featuring long intermediation chains might thus constitute an efficient market response to frictions, in which case no regulatory action is warranted.

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.

Research on Information Structure of Programmatic Advertising Markets

With the abundance of online big data and computing resources, as well as the rapid develop-ment and diversification of business models, programmatic advertising (PA) has emerged and become the mainstream and one of the most promising advertising channels in recent years. As an effective way to precision marketing, PA relies heavily on the information elicited from analyzing Web users and pages, which can help advertisers precisely identify their best-matched audiences and evaluate the ad impressions in a real-time fashion In PA markets, publishers serve as the supplier of ad impressions, and have control on whether, what and how to reveal such key information to advertisers. These decisions play a central role in the information structure of data-driven PA markets, and attract intensive research interests. In this paper, we strive to investigate publishers’ rational preference over the symmetric and asymmetric information structures, with the aim of maximizing their revenues. Our model views publishers’ revenue as a function of the information structure among advertisers, and we hereby proved its convexity under an incentive compatible mechanism. This conclusion indicates that publishers prefer an asymmetric information structure rather than a symmetric one. Our research findings can help improve publishers’ revenue, and also can explain the underlying rationale for the hybrid PA markets mixed by public real-time bidding and private marketplaces.

Mechanism Design with Interdependent Valuations and Ambiguity

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 ambiguity averse 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.

Testosterone and Cortisol Jointly Predict the Ambiguity Premium in an Ellsberg-Urns Experiment.

Previous literature has tried to establish whether and how steroid hormones are related to economic risk-taking. In this study, we investigate the relationship between testosterone (T) and cortisol (C) on one side and attitudes toward risk and ambiguity on the other. We asked 78 male undergraduate students to complete several tasks and provide two saliva samples. In the task “Reveal the Bag,” participants expressed their beliefs on an ambiguous situation in an incentivized framework. In the task “Ellsberg Bags,” we elicited from the participants through an incentive-compatible mechanism the reservation prices for a risky bet and an ambiguous bet. We used the difference between the two prices to calculate each participant's ambiguity premium. We found that participants' salivary T and C levels jointly predicted the ambiguity premium. Participants featuring comparatively lower levels of T and C showed the highest levels of ambiguity aversion. The beliefs expressed by a subset of participants in the “Reveal the Bag” task rationalize (in a revealed preference sense) their choices in the “Ellsberg Bags” task.

Mechanism Design Without Quasilinearity

This paper studies a model of mechanism design with transfers where agents' preferences need not be quasilinear. In such a model: (1) we characterize dominant strategy incentive compatible mechanisms using a monotonicity property; (2) we establish a revenue uniqueness result: for every dominant strategy implementable allocation rule, there is a unique payment rule that can implement it; and (3) we show that every dominant strategy incentive compatible, individually rational, and revenue-maximizing mechanism must charge zero transfer for the worst alternative (outside option). These results are applicable in a wide variety of problems (single object auction, multiple object auction, public good provision etc.) under suitable richness of type space. In particular, our results can be applied to models where preferences of agents are arbitrarily small perturbations of quasilinear preferences and illustrate the (non)-robustness of some of the classic results in mechanism design with quasilinearity. We show various applications of our results.

An Efficient and Incentive Compatible Mechanism for Wholesale Electricity Markets

Being widely used in many deregulated wholesale electricity markets, the locational marginal pricing (LMP) mechanism is known to achieve social optimality in a competitive market. When profit-maximizing generators act strategically to manipulate prices; however, LMP may lead to high loss of economic efficiency. In this paper, we apply the Vickrey-Clarke–Groves (VCG) mechanism to wholesale electricity markets. We show that the VCG mechanism minimizes the total cost at a truth-telling dominant strategy equilibrium. We establish an important comparative result that the VCG mechanism always results in higher per-unit electricity prices than the LMP mechanism under any given set of reported supply curves. Numerical results show that the difference between the per-unit prices resulting from the two mechanisms is negligibly small (about 4%) in the IEEE 14-bus and 30-bus test systems. Finally, we apply the VCG mechanism to a day-ahead setting with start-up cost (of conventional generators) and intermittent renewable generation. We show that the VCG mechanism induces the truth-telling behavior of conventional generators in dominant strategies and yields each conventional generator a non-negative expected profit.

Optimal incentive compatible mechanism in a system with several active elements

This paper considers the optimal mechanism design problems in an active system composed of a Principal and several active elements (AEs) with a shared incentive fund under the Principal's incomplete awareness about the model parameters of the AEs. We find the optimal mechanisms that include the planning procedures, the penalty and incentive functions, as well as the incentive fund calculation and allocation procedures under which the AEs are interested in truth-telling and plan fulfillment.

Mechanism Design with Aftermarkets: On the Impossibility of Pure Information Intermediation

A mediator, with no prior information and no control over the market protocol, attempts to redesign the information structure in the market by running an information intermediation mechanism with transfers that first elicits information from an agent, and then discloses information to another market participant (third party). The note establishes a general impossibility result: If the third party has full bargaining power in the interaction with the agent, all incentive-compatible information intermediation mechanisms are uninformative about the agent's type.

Spanning tree auctions: A complete characterization

We consider a mechanism design problem over a connected graph in private value environment where the type of an agent is a single number. The preference over transfers is quasi-linear for every agent. We give a complete characterization of dominant strategy incentive compatible mechanisms for this problem. Further, by imposing a suitable version of anonymity and non-bossiness along with dominant strategy incentive compatibility, we find that the only mechanisms satisfying all these conditions are the Groves mechanisms.