Prior symmetry, similarity-based reasoning, and endogenous categorization

This paper presents a rational theory of categorization and similarity-based reasoning. I study a model of sequential learning in which the decision maker infers unknown properties of an object from information about other objects. The decision maker may use the following heuristics: divide objects into categories with similar properties and predict that a member of a category has a property if some other member of this category has this property. The environment is symmetric: the decision maker has no reason to believe that the objects and properties are a priori different. In symmetric environments, categorization is an optimal solution to an inductive inference problem. Any optimal solution looks as if the decision maker categorizes. Various experimental observations about similarity-based reasoning coincide with the optimal behavior in my model.     

Bidding behavior in asymmetric auctions: An experimental study

We review an asymmetric auction experiment. Based on Plum (Int. J. Game Theory 20 (1992) 393) private valuations of the two bidders are independently drawn from distinct but commonly known distributions, one of which first-order stochastically dominates the other. We test the qualitative properties of that model of asymmetric auctions, in particular whether the weak bidder behaves more aggressively than the strong, and then test bidders’ preference for first- vs. second-price auctions.     

Sustainable growth in a model with dual-rate discounting

In an important model of growth and pollution proposed by Stokey [Int. Econ. Rev. 39 (1998) 1] neither the rate of economic growth nor the rate of growth of emissions depends on the time preference of the representative agent, which seems somewhat paradoxical. To resolve this paradox, we introduce into Stokey's model the assumption of dual-rate discounting, prove the existence of a sustainable balanced growth optimal path, and show that the growth rates of output and emissions are increasing in the proportion between the consumption and the environmental discount factors of the representative agent.     

On ascending Vickrey auctions for heterogeneous objects

We construct an ascending auction for heterogeneous objects by applying a primal-dual algorithm to a linear program that represents the efficient-allocation problem for this setting. The auction assigns personalized prices to bundles, and asks bidders to report their preferred bundles in each round. A bidder's prices are increased when he belongs to a “minimally undersupplied” set of bidders. This concept generalizes the notion of “overdemanded” sets of objects introduced by Demange, Gale, and Sotomayor for the one-to-one assignment problem. Under a submodularity condition, the auction implements the Vickrey-Clarke-Groves outcome; we show that this type of condition is somewhat necessary to do so. When classifying the ascending-auction literature in terms of their underlying algorithms, our auction fills a gap in that literature. We relate our results to various ascending auctions in the literature.     

On efficiency of the English auction

We study efficiency properties of the irrevocable exit English auction in a setting with interdependent values. Maskin (1992) [1] shows that the pairwise single-crossing condition is sufficient for efficiency of the English auction with two bidders and suggests that it is also a necessary condition. This paper clarifies and extends Maskin?s results to the case of N bidders. We introduce the generalized single-crossing condition—a fairly intuitive extension of the pairwise single-crossing condition—and prove that it is essentially a necessary and sufficient condition for the existence of an efficient equilibrium of the N-bidder English auction.     

An experimental investigation of entry cost effects in sealed-bid dollar auctions

We experimentally study the effect of entry costs on bidding and entry behavior in common value auctions. We find, with entry costs, players bid lower in first price and higher in second price auctions, compared to no entry fee auctions.     

Quality cut-offs in procurement auctions

Recently the Government of India used procurement auction mechanisms with endogenously determined minimum quality. We find these auctions have no equilibrium in continuous symmetric monotonic pure strategies. This may substantiate the use of auction mechanisms with exogenously determined minimum quality.     

Asymmetric auctions with resale: An experimental study

We study auctions with resale based on Hafalir and Krishna's (2008) [6] model. As predicted, weak bidders bid more with resale than without, so that average auction prices tend to increase. When the equilibrium calls for weak types to bid higher than their values with resale they do, but not nearly as much as the theory predicts. In other treatments outcomes are much closer to the risk neutral Nash model's predictions. Bid distributions for weak and strong types are more similar with resale than without, in line with the theory.     

Substitute goods, auctions, and equilibrium

This paper identifies two notions of substitutes for auction and equilibrium analysis. Weak substitutes, the usual price-theory notion, guarantees monotonicity of tâtonnement processes and convergence of clock auctions to a pseudo-equilibrium, but only strong substitutes, which treats each unit traded as a distinct good with its own price, guarantees that every pseudo-equilibrium is a Walrasian equilibrium, that the Vickrey outcome is in the core, and that the “law of aggregate demand” is satisfied. When goods are divisible, weak substitutes along with concavity guarantees all of the above properties, except for the law of aggregate demand.     

Measuring stress in money markets: A dynamic factor approach

We extract an index of interest rate spreads from various money market segments to assess the level of funding stress in real time. We find that during the 2007–2009 financial crisis, money markets switched between low and high stress regimes except for brief periods of extreme stress. Transitions to lower stress regimes are typically associated with the non-standard policy measures by the Federal Reserve.     

Informational limitations of ascending combinatorial auctions

We study the inherent limitations of natural widely-used classes of ascending combinatorial auctions. Specifically, we show that ascending combinatorial auctions that do not use both non-linear prices and personalized prices cannot achieve social efficiency with general bidder valuations. We also show that the loss of efficiency can be severe and that only a diminishing fraction of the social welfare may be captured. This justifies the added complexity in the auctions suggested by, e.g., Parkes and Ungar (2000) [29] and Ausubel and Milgrom (2002) [2].     

An experimental test of design alternatives for the British 3G/UMTS auction

In spring 2000, the British government auctioned off licences for Third Generation mobile telecommunications services. In the preparation of the auction, two designs involving each a hybrid of an English and a sealed-bid auction were considered by the government: A discriminatory and a uniform price variant. We report an experiment on these two designs, and also compare the results to those with a pure English auction. Both hybrids are similar in efficiency, revenue differences disappear as bidders get experienced. Compared to the discriminatory format, the pure English auction induces more entry.     

The Herodotus paradox

The Babylonian bridal auction, described by Herodotus, is regarded as one of the earliest uses of an auction in history. Yet, to our knowledge, the literature lacks a formal equilibrium analysis of this auction. We provide such an analysis for the two-player case with complete and incomplete information, and in so doing identify what we call the “Herodotus paradox.”     

Branching bandits: a sequential search process with correlated pay-offs

This paper presents a model of a sequential search process for the best outcome of many multi-stage projects. The branching structure of the search environment is such that the payoffs to various actions are correlated; nevertheless, it is shown that the optimal strategy is given by a simple reservation price rule.