Essays in Collective Decision Making vorgelegt von Felix Jarman Inauguraldissertation zur Erlangung des akademischen Grades eines Doktors der Wirtschaftswissenschaften der Universit¨atMannheim an der Fakult¨atf¨urRechtswissenschaft und Volkswirtschaftslehre Abteilung Volkswirtschaftslehre Juli 2016 Abteilungssprecher: Prof. Dr. Carsten Trenkler Referent: Prof. Dr. Hans Peter Gr¨uner Koreferent: Prof. Dr. Thomas Tr¨oger Verteidigung: 05.09.2016 Declaration of Authorship I, FELIX JARMAN, declare that this thesis titled, `Essays in Collective Decision Making' and the work presented in it are my own. Chapter2 is joint work with Vincent Meisner and was written in close cooperation. No other sources or means except the ones listed have been employed. Signed: Date: ii Acknowledgements First of all, I thank my supervisor Hans Peter Gr¨unerfor his guidance and for his support. I experienced him as a great teacher and as somebody who is always chasing the most interesting and relevant questions. It is in large part due to him, that my interests fell where they fell and it was one of his questions that laid the seed for the first paper of this thesis. I also thank my co-supervisor Thomas Tr¨oger. I learned a lot in his seminars and without his invaluable feedback the aforementioned first paper would never have achieved its present form. I need to thank Vincent Meisner, who is not only my co-author but who is also a close friend. I met Vincent literally on my second day in Mannheim, almost nine years ago. Now, together, we are the proud parents of our joint paper and I am extremely grateful to him. I would like to thank Benjamin Balzer, Johannes Schneider, and Chris Wolf, with whom I (and also Vincent) not only discussed research, but also football, chess, and life in general, almost every day over lunch. I am grateful to Johannes Bubeck and Christoph Siemroth for being both good office-mates and friends. Christoph always had cookies and was happy to share them. I thank many, many people in Mannheim and at other places: for reading my research, for pursuing joint research ideas, for listening to me in seminars, for providing helpful comments and advice, for playing squash with me, or just for being fun to be around. I could not possibly name everybody who deserves my thanks, nevertheless, I want to mention (in alphabetical order): Tobias Etzel, Timo Hoffmann, Volker Nocke, Sebastian Siegloch, Andr´eStenzel, and Philipp Zahn. Finally, I wish to thank my parents Francis and Kyung, my sister Lucy, and my girlfriend Erika. Thank you for always supporting me. iii Contents Declaration of Authorship ii Acknowledgements iii 1 General Introduction1 I Chapter2................................2 II Chapter3................................3 III Chapter4................................3 2 Ex-post Optimal Knapsack Procurement5 I Introduction...............................5 I.i Literature............................9 II Model.................................. 13 III Analysis................................. 15 III.i The symmetric case....................... 26 III.ii The asymmetric case...................... 31 IV Discussion................................ 39 IV.i Residual money......................... 39 V Conclusion................................ 41 VI Appendix................................ 44 VI.A Properties of optimal mechanisms: General proofs...... 44 VI.B Constructing a scoring function: Proof of Proposition 2.11. 50 VI.C The symmetric case....................... 55 VI.D Bidder Substitutability and Complementarity........ 55 3 Groups, cheap talk, and voting 58 I Introduction............................... 58 II Model.................................. 61 III Analysis................................. 63 IV Conclusion................................ 74 V Appendix................................ 79 4 In or Out - the effect of small parties winning representation in proportional representation systems. A regression discontinuity design. 92 I Introduction............................... 92 iv Contents v I.i Related literature........................ 95 II The RD approach............................ 98 II.i Specification........................... 100 III Municipal politics and data...................... 102 III.i The voting method....................... 102 III.ii Politics on the municipal level................. 103 III.iii Main outcomes......................... 104 III.iv Constructing the dataset.................... 106 III.v Trimming with respect to investment per capita....... 108 IV Results.................................. 108 IV.i Determinants of the average treatment effect......... 118 V Robustness checks............................ 123 V.i Sensitivity to trimming..................... 126 VI Conclusion................................ 127 Bibliography 138 1. General Introduction \Collective Decision Making" is a subfield of microeconomics that investigates how public decision-making processes and public organizations work or alterna- tively how they should work. This dissertation consists of three self-contained papers related to this subfield. In the broadest terms, these papers investigate public decision making processes, i.e., they ask how a decision that involves sev- eral individuals is or should be made. The question is not trivial, in particular if these individuals have potentially different preferences and have private informa- tion that is relevant to the decision. If the question is how the the decision making process should be designed, the answer can be found using the tools of mechanism design. Chapter2, which is joint work with Vincent Meisner, is such a mechanism design exercise. We derive the mechanism that allows for the optimal procurement of projects by a budget- constrained procurement agency under ex-post constraints. In Chapter3, I use game theory to analyze a particular decision-making process: voting. In the context of a committee voting on a reform, I ask whether how the possibility of pre-vote cheap talk communication affects outcomes, when the committee consists of two distinct groups. Finally, in Chapter4 I look at voting from an empirical perspective. Using data from local elections in Thuringia, I investigate how a small party winning rep- resentation on the municipal council affects the council's policies and the party itself. In the remainder of this introduction, I give a short overview for each chapter. 1 Contents 2 Chapter2 In this chapter, we investigate how to design a specific decision-making process. In particular, we ask ourselves how to organize public procurement. Public procure- ment is an immensely important part of the economy, amounting to, for example, 16 percent of GDP in the EU.1 We have a specific public procurement situation in mind. We consider a procure- ment agency that has a fixed budget and cannot go over budget. It wants to procure projects from different suppliers who propose one project each. The pro- curement agency knows how much it values each project but the projects' costs are the suppliers' private information. The agency aims to maximize the aggregate value of implemented projects. We want to design a mechanism for this problem that is as robust as possible. Therefore, we impose that all constraints (budget, incentive, and participation) have to hold ex-post. Our leading example for a concrete procurement problem is that of a development fund that has a fixed budget to build wells in different areas. It knows how valuable a well is in a given community, but it does not know how much money is necessary to build the well. If costs were not private information, this problem would be the classical knapsack problem: An individual (development fund) has a knapsack that can carry a cer- tain amount of weight (budget). It wants to maximize the value of items (wells) it carries in this knapsack. However, the total weight of carried items (sum of costs of built wells) cannot exceed the capacity of the knapsack. With private information, this problem becomes a mechanism design problem. However, given our set of constraints, it cannot be solved with the standard pointwise-optimization techniques. Instead, we derive characteristics that the op- timal procurement mechanism must have. Those characteristics imply that the optimal mechanism lies within the class of DA-auctions, a class of mechanisms proposed by Milgrom and Segal(2014). As DA auctions are equivalent to clock auctions, this result implies that our optimal procurement mechanism has a cor- responding descending-clock auction. If projects are ex-ante asymmetric, we find a novel and interesting quantity-quality tradeoff: out of two projects the procurement agency must sometimes implement 1Source: http://ec.europa.eu/trade/policy/accessing-markets/public-procurement/ Contents 3 the inferior project in order to get both projects with a high probability. This novel tradeoff occurs because here, in contrast to similar mechanisms, the quantity of procured projects is endogenously determined. Chapter3 This chapter is about analyzing voting as a decision-making process from a game- theoretical perspective. In particular, it contributes to the literature on the strate- gic interaction of cheap talk and voting. In it, I consider a committee that consists of two differently sized groups, each with members that have homogeneous prefer- ences. The committee must vote on whether to implement a reform that impacts all members of the committee. Committee members have private information about the probability of success of the reform. Thus, voting can be seen as