14.125: Market Design Last updated: 2/3/14 This is an advanced topics course on market and mechanism design. We will study existing or new market institutions, understand their properties, and think about whether they can be re-engineered or improved. This course assumes knowledge of the first year economics PhD sequence, especially microeconomic theory (14.121-4). Game theory (14.126) and courses from the industrial organization sequence are helpful, but not essential as background. Instructor: Parag Pathak, E17-240, [email protected] OH: Wednesday 1-2pm, or by appt TA: Yusuke Narita, [email protected], OH: TBD Course requirements: There will be three problem sets and one final paper. Depending on final course enrollment, we may ask students to do a class presentation on their final paper. Details will be distributed later in the semester. Recommended Textbooks: Milgrom, Paul (2004): Putting Auction Theory to Work. Churchill Lectures, Cambridge University Press. Roth, Alvin E. and Marilda Sotomayor (1990): Two-Sided Matching: A Study in Game- Theoretic Modelling and Analysis. Econometric Society Monograph Series, Cambridge University Press. These other books may be of interest: Krishna, Vijay (2002): Auction Theory. Academic Press. Klemperer, Paul (2004): Auctions: Theory and Practice. Toulouse Lectures, Princeton University Press. Moulin, Herv´e(1991): Axioms of Cooperative Decision Making. Econometric Society Monograph Series, Cambridge University Press. Shiller, Robert (1998): Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks. Clarendon Lectures, Oxford University Press. Outline and References: 1. Introduction • Roth, Alvin E. (2002): \The Economist as Engineer: Game Theory, Experimen- tation, and Computation as Tools for Design Economics." Econometrica, 70(4), 1341-1378. 1 • Klemperer, Paul (2002): \What Really Matters in Auction Design?" Journal of Economic Perspectives, 16(1): 169-189. • Hahn, Robert W. (1984): \Market Power and Transferable Property Rights." Quar- terly Journal of Economics, 99(4): 753-765. • Joskow, Paul, Richard Schmalensee, and Elizabeth Bailey (1998): \The Market for Sulfur Dioxide Emissions." American Economic Review, 88(4), 669-685. • Weitzman, Martin (1977): \Is the Price System or Rationing More Effective in Get- ting a Commodity to Those Who Need it Most?" The Bell Journal of Economics, 8, 517-524. • Sah, Raj (1987): \Queues, Rations, and Market: Comparisons of Outcomes for the Poor and the Rich." American Economic Review, 77, 69-77. • Che, Y., I. Gale, and J. Kim (2013): \Allocating Resources to Budget-Constrained Agents." Review of Economic Studies, 80, 73-107. • Leslie, Phil and Alan Sorenson (2013): \Resale and Rent-Seeking: An Application to Ticket Markets." Review of Economic Studies, forthcoming • Bleakly, Hoyt and Joe Ferrie (2013): \Land Openings on the Georgia Frontier and the Coase Theorem in the Short- and Long-Run." Working paper, University of Chicago. • Coase, Ronald (1959): \The Federal Communications Commission." Journal of Law and Economics, 2, 1-41. • Coase, Ronald (1960): \The Problem of Social Cost." Journal of Law and Eco- nomics, 3, 1-44. 2. Basic Mechanism Design and Strategy-Proofness • Gibbard, Alan (1973): \Manipulation of Voting Schemes: A General Result." Econo- metrica , 41(4): 587-601. • Sattherwaite, Mark (1975): \Strategy-proofness and Arrow's Conditions: Existence and Correspondence Theorems for Voting Procedures and Social Welfare Functions." Journal of Economic Theory, 10: 187-217. • Reny, Phil (2002): \Arrow's Theorem and the Gibbard-Satterthwaite Theorem: A Unified Approach." Economics Letters, 70(1): 99-105. • Gibbard, Alan (1977): \Manipulation of Schemes that Mix Voting with Chance." Econometrica, 45: 665-681. • McLennan, Andy (2010): \Manipulation in Elections with Uncertain Preferences." Unpublished mimeo, University of Queensland. • Holmstr¨om,Bengt (1979): \Groves Schemes on Restricted Domains." Econometrica, 47(5): 1137-1144. • Green, Jerry R. and Jean-Jacques Laffont (1977): \Characterization of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods." Econometrica, 45(2): 427-438. • Milgrom, P. and I. Segal (2002): \The Envelope Theorem for Arbitrary Choice Sets," Econometrica, 70(2): 583-601. 2 • Bikchandani, S., S. Chatterji, R. Lavi, A. Mualem, N. Nisan, and A. Sen (2006): \Weak Monotonocity Characterizes Deterministic Dominant Strategy Implementa- tion." Econometrica, 74(4): 1109-1132. • Wilson, Robert (1989): “Efficient and Competitive Rationing." Econometrica, 57, 1-40. • Sprumont, Yves (1991): \The Division Problem with Single-Peaked Preferences: A Characterization of the Uniform Allocation Rule." Econometrica, 59, 509-519. • Moulin, Herv´e(2000): \Priority Rules and Other Asymmetric Rationing Methods." Econometrica, 68(3): 643-684. 3. One-Sided Matching • Shapley, Lloyd and Herbert Scarf (1974): \On Cores and Indivisibility." Journal of Mathematical Economics, 1: 23-28. • Roth, Alvin E. and Andrew Postlewaite (1977): \Weak Versus Strong Domination in a Market with Indivisible Goods." Journal of Mathematical Economics, 4: 131-137. • Roth, Alvin E. (1982): \Incentive Compatibility in a Market with Indivisibilities." Economics Letters, 9: 127-132. • Hylland, Arnuand and Richard Zeckhauser (1977): \The efficient allocation of indi- viduals to positions." Journal of Political Economy, 87: 293-314. • Abdulkadiro˘glu,Atila and Tayfun S¨onmez(1999): \House Allocation with Existing Tenants." Journal of Economic Theory, 88: 233-260. • Roth, Alvin E., Tayfun S¨onmezand M. Utku Unver¨ (2003): \Kidney Exchange." Quarterly Journal of Economics, 119, 457-488. 4. Stochastic Matching Mechanisms • Abdulkadiro˘glu,Atila and Tayfun S¨onmez.(1998): \Random Serial Dictatorship and the Core from Random Endowments in House Allocation Problems." Econometrica, 66: 689-701. • S¨onmez,Tayfun and Utku Unver¨ (2005): \House Allocation with Existing Tenants: An Equivalence." Games and Economic Behavior, 52: 153-185. • Pathak, Parag and Jay Sethuraman (2011): \Lotteries in Student Assignment: An Equivalence Result." Theoretical Economics, 6(1): 1-18. • Bogomolnaia, Anna and Herve Moulin (2009): \A New Solution to the Random Assignment Problem." Journal of Economic Theory, 100: 295-328. • Kojima, Fuhito and Mihai Manea (2010): \Incentives in the Probabilistic Serial Mechanism." Journal of Economic Theory, 145: 106-123. • Kojima, Fuhito and Yeon-Koo Che (2010): \The Asymptotic Equivalence of Proba- bilistic Serial and Random Priority Mechanisms." Econometrica, 78: 1625-1672. • Liu, Qingming and Marek Pycia (2012): \Ordinal Efficiency, Fairness, and Incentives in Large Markets." Working paper, Columbia University. 3 • Hall, P. (1935): \On Representatives of Subsets." Journal of Mathematical Society, 19, 26-30. • Dutta, Bhaskar and Debray Ray (1989): \A Concept of Egalitarianism under Par- ticipation Constraints." Econometrica, 57, 615-35. • Bogolmanaia, Anna and Herve Moulin (2004): \Random Matching under Dichoto- mous Preferences." Econometrica, 72: 257-279. • Katta, Akshay-Kumar and Jay Sethuraman (2006): \A Solution to the Random Assignment Problem on the Full Preference Domain." Journal of Economic Theory, 131(1): 231-250. • Roth, Alvin E. , Tayfun S¨onmez, and M. Utku Unver (2005): \Pairwise Kidney Exchange." Journal of Economic Theory, 125(2): 151-188. • Roth, Alvin E., Tayfun S¨onmez,and Utku Unver¨ (2007): “Efficient Kidney Exchange: Coincidence of Wants in Markets with Compatibility-Based Preferences." American Economic Review, 97(3): 828-851. 5. Axiomatic Resource Allocation • Ma, Jipeng (1994): \Strategy-proofness and Strict Core in a Market with Indivisi- bilities." International Journal of Game Theory, 23: 75-83. • S¨onmez,Tayfun (1999): \Strategy-proofness and Essentially Single-valued Cores." Econometrica, 67(3): 677-689. • Svensson, Lars-Gunnar (1994): \Queue allocation of indivisible goods." Social Choice and Welfare 11, 323-330. • Svensson, Lars-Gunnar (1999): \Strategyproof Allocation of Indivisible Goods." So- cial Choice and Welfare 16, 557-567. • Papai, Szilvia (2000): \Strategyproof Assignment by Hierarchical Exchange", Econo- metrica, 68: 1403-1433. • S¨onmez,Tayfun and Utku Unver¨ (2010): \House Allocation with Existing Tenants: A Characterization." Games and Economic Behavior, 69(2): 425-445. • Pycia, Marek and Utku Unver¨ (2012): \Incentive Compatible Allocation and Ex- change of Discrete Resources." Working paper, UCLA. 6. Two-sided matching • Roth and Sotomayor, Chapters 2-5. • Gale, David and Lloyd Shapley (1962): \College Admissions and the Stability of Marriage." American Mathematical Monthly, 69: 9-15. • Roth, Alvin E. (1984): \The Evolution of the Labor Market for Medical Interns and Residents: A Case Study in Game Theory." Journal of Political Economy, 92: 991-1016. • Niederle, Muriel and Alvin E. Roth (2003): \Relationship Between Wages and Pres- ence of a Matching in Medical Fellowships." Journal of the American Medical Asso- ciations, 290(9): 1153-1154. 4 • Bulow, Jeremy and Levin, Jonathan (2006): \Matching and Price Competition." American Economic Review, 96(3): 652-668. • Roth, Alvin E. (1991): \A Natural Experiment in the Organization of Entry Level Labor Markets: Regional Markets for New Physicians and Surgeons in the U.K." American Economic Review, 81, 415-440. 7. Unraveling, timing, and congestion • Roth, Alvin E. and X. Xing (1994): \Jumping the Gun: Imperfections and Institu- tions Related to the Timing of Market Transactions." American Economic Review, 84, 992-1044. • Li, Hao and Sherwin