Workshop Schedule for Spring 2012:

The workshop organizers for the Fall 2011quarter are Haresh Sapra and John Birge.

The Workshop on Applied Theory meets on Mondays, 1:30-3:00 PM, in Harper Center, Room 3B.

March 26

Tim Roughgarden, Stanford

"Intrinsic Robustness of the Price of Anarchy"

 

Abstract:

The price of anarchy, defined as the ratio of the worst-case objective function value of a Nash equilibrium of a game and that of an optimal outcome, quantifies the inefficiency of self ish behavior. Remarkably good bounds on this measure have been proved in a wide range of application domains. How ever, such bounds are meaningful only if a game’s partici pants successfully reach a Nash equilibrium. This drawback
motivates inefficiency bounds that apply more generally to weaker notions of equilibria, such as mixed Nash equilibria, correlated equilibria, or to sequences of outcomes generated by natural experimentation strategies, such as simultaneous regret-minimization.

 

We prove a general and fundamental connection between the price of anarchy and its seemingly more general relatives. First, we identify a“canonical sufficient condition”for an up- per bound on the price of anarchy of pure Nash equilibria, which we call a smoothness argument. Second, we prove an “extension theorem”: every bound on the price of anarchy that is derived via a smoothness argument extends automatically, with no quantitative degradation in the bound, to mixed Nash equilibria, correlated equilibria, and the average objective function value of every no-regret sequence of joint repeated play. Third, we prove that in routing games smoothness arguments are “complete” in a proof-theoretic sense: despite their automatic generality, they are guaran teed to produce an optimal worst-case upper bound on the price of anarchy.

 

Here's a link to the paper

April 2

Bruno Biais, Toulouse School of Economics

"Risk--Sharing or Risk--Taking? Incentives, Hedging and Margins"

 

Abstract:

We analyze optimal hedging contracts and show that although hedging aims at sharing risk, it can lead to more risk-taking. News implying that a hedge is likely to be loss-making undermines the risk-prevention incentives of the protection seller. This incentive problem limits the capacity to share risks and generates endogenous counterparty risk. Optimal hedging can therefore lead to contagion from news about insured
risks to the balance sheet of insurers. Such endogenous risk is more likely to materialize ex post when the ex ante probability of counterparty default is low. Variation margins emerge as an optimal mechanism to enhance risk-sharing capacity. Paradoxically, they can also induce more risk-taking. Initial margins address the market failure caused by unregulated trading of hedging contracts among protection sellers.

Here's a link to the paper

April 9

Andy Postlewaite, University of Pennsylvania, Department of Economics

"Cautiousness" (with Olivier Compte, PSE, Paris)

 

Abstract:

A standard approach in modeling uncertainty in economic models is to assume that there is a probability distribution over the states of nature and that the decision maker receives a signal that is correlated with the
state. In the vast majority of papers in this literature, it is assumed, often implicitly, that the decision maker knows the joint distribution over states and signals. We argue that this assumption is unrealistic, and perhaps more importantly, that this unrealistic assumption can lead directly to unrealistic conclusions. We suggest an alternative approach that does not assume that the decision maker knows the joint distribution, and illustrate the approach in several simple examples.

Here's a link to the paper

April 16

Rakesh Vohra, Kellogg School of Managmeent, Northwestern University

"Auction Design with Fairness Concerns: Subsidies vs. Set-Asides"

(with Mallesh M. Pai)

 

Abstract:

Government procurement and allocation programs often use subsidies and set asides favoring small businesses and other target groups to address fairness concerns. These concerns are in addition to standard objectives such as efficiency and revenue. We study the design of the optimal mechanism for a seller concerned with efficiency, subject to a constraint to favor a target group. In our model, buyers' private values are determined by costly pre-auction investment. If the constraint is distributional, i.e. to guarantee that the target group wins `sufficiently often', then the constrained efficient mechanism is a at subsidy. This is consistent with ndings in the empirical literature. In contrast, if the constraint is to ensure a certain investment level by the target group, the optimal mechanism is a type dependent subsidy. In this case a set
aside may be better than a at or percentage subsidy.

 

Here's a link to the paper

 

April 23

Philipp Kircher, London School of Economics

"Efficient Cheap Talk in Directed Search: On the Non-essentiality of Commitment in Market Games" (with Kyungmin Kim)

 

Abstract:

Directed search models are market games in which each firm announces a wage commitment to attract a worker. Miscoordination among workers generates search frictions, yet in equilibrium more productive firms post more attractive wage commitments to fill their vacancies faster, which yields constrained efficient outcomes. We show that commitment is not essential: Exactly the same efficient allocation can be sustained when announcements are pure cheap talk followed by a suitable subsequent wage-formation stage. The insights from existing commitment models extend unchanged to such a cheap-talk environment, even when workers differ in outside opportunities or observable common productivity.

 

Here's a link to the paper

April 30

Eric Budish, Chicago Booth

"Strategyproofness in the Large as a Desideratum for Market Design" (with Eduardo M. Azevedo)

 

Abstract:

We propose a criterion of approximate strategyproofness (SP), called strategyproof in the
large (SP-L). A mechanism is SP-L if, for any agent, any probability distribution of the other
agents' reports, and any ε>0, in a large enough market the agent maximizes his expected payo
to within ε by reporting his preferences truthfully. Conceptually, SP-L distinguishes between
two kinds of non-SP mechanisms: those where protable misreports vanish as the market grows
large in our sense, and those where protable misreports persist even as the market grows large.
Our main result shows that, under some assumptions, SP-L is approximately costless to satisfy
in large markets relative to Bayes-Nash or Nash implementability. The assumptions include
anonymity, private values, and a continuity condition. We interpret the result as justifying SP-
L as a second-best desideratum, especially for problems for which the benets of SP design are
compelling (e.g., compliance with the Wilson doctrine) yet it is known that mechanisms that
are exactly SP are unattractive. We illustrate with examples from assignment, matching, and
auctions.

Here's a link to the paper

May 7

CANCELED

 

May 14

Alex Frankel, Chicago Booth

"Delegating Multiple Decisions"

 

Abstract:

In a class of delegation problems over multiple decisions, it is optimal for the principal to cap the agent's choices against the direction of her bias. Geometrically, this corresponds to a half-space delegation set.

Here's a link to the paper

May 21

CANCELED

 

Abstract:

 

Here's a link to the paper

 

 

Workshop Schedule for Fall 2011:

The workshop organizers for the Fall 2011quarter are Canice Prendergast and Eric Budish.

The Workshop on Applied Theory meets on Mondays, 1:30-3:00 PM, in Harper Center, Room 3B.

September 26

Xavier Vives, IESE Business School

"Endogenous Public Information and Welfare"

 

Abstract:

This paper performs a welfare analysis of economies with private information when public information is endogenously generated and agents can condition on noisy public statistics in the rational expectations tradition. We find that increasing the degree of complementarity of actions of agents increases reliance on public information under strategic complementarity but decreases it under strategic substitutability. Equilibrium is not (restricted) efficient even when feasible allocations share similar properties to the market context (e.g., linear in information). The reason public statistics (e.g., prices) convey information. Under strategic substitutability, equilibrium prices will tend to convey too little information when the "informational" role of prices prevails over its index of scarcity" role and too much information in the opposite case. Under strategic complementarity, prices always convey too little information. These results extend to the internal efficiency benchmark (accounting only for the collective welfare of the active players). However, received results-- on the relative weights place by agents on private and public information, when the latter is exogenous-- may be overturned.

Here's a link to the paper

October 3

Federico Echenique, California Institute of Technology

"A Revealed Preference Approach to Computational Complexity in Economics" (with Daniel Golovin and Adam Wierman)

 

Abstract:

Recent results in complexity theory suggest that various economic theories require agents to solve computationally intractable problems. However, such results assume the agents are optimizing explicit utility functions, whereas the economic theories merely assume the agents behave rationally, where rational behavior is defined via some optimization problem. Might making rational choices be easier than solving the corresponding optimization problem? For at least one major economic theory, the theory of the consumer (which simply postulates that consumers are utility maximizing), we find this is indeed the case. In other words, we prove the possibly surprising result that computational constraints have no empirical consequences for consumer choice theory. Our result motivates a general approach for posing questions about the empirical content of computational constraints: the revealed preference approach to computational complexity. This approach complements the conventional worst-case view of computational complexity in important ways, and is methodologically close to mainstream economics.

Here's a link to the paper

 

 

October 10

Kostas Koufopoulos, University of Warwick

"Endogenous Commitment and Nash Equilibria in Competitive Markets with Adverse Selection"

 

Abstract:

In this paper, we provide a unified framework for analyzing competitive markets with adverse selection. The key feature of our model is that whether the firms (uninformed) are committed to the contracts they offer or not is determined endogenously. Due to endogenous commitment, our model always has a unique Bayes-Nash equilibrium without using any refinement to restrict beliefs off-the-equilibrium path. This feature
makes our approach very useful for applied theory papers where usually the uniqueness of the equilibrium is crucial for the model’s empirical relevance and testability. We also show that both the non-existence problem in the two-stage screening games and the multiplicity of equilibria in the three-stage screening and the signalling games are due to exogenous full commitment (non-existence) and exogenous lack of commitment (multiplicity). Finally, we provide a rationale for the widely observed fact that banks, insurance companies and many non-financial firms keep the right to reject applications for (some of) the contracts they offer.

 

Here's a link to the paper

Additionaly, this paper may be of interst to those attending the presentation

 

October 17

Holger Mueller, New York University

(with Mike Burkart, Denis Gromb, and Fausto Panunzi)

"Legal Investor Protection and Takeovers"

Abstract:

We study the role of legal investor protection for the efficiency of the market for corporate control. Stronger legal investor protection limits the ease with which an acquirer, once in control, can extract private benefits at the expense of non-controlling investors. This, in turn, increases the acquirer’s capacity to raise outside funds to finance the takeover. Absent effective competition for the target, the increased outside funding capacity does not make efficient takeovers more likely, however, because the bid price, and thus the acquirer’s need for funds, increase in lockstep with his pledgeable income. In contrast, under effective competition, the increased outside funding capacity makes it less likely that the takeover outcome is determined by the bidders’ financing constraints–and thus by their internal funds–and more likely that it is determined by their ability to create value. Accordingly, stronger legal investor protection can improve the efficiency of the takeover outcome. Taking into account the interaction between legal investor protection and financing constraints also provides new insights into the optimal allocation of voting rights, sales of controlling blocks, and the role of legal investor protection in cross-border mergers and acquisitions.

Here's a link to the paper

 

 

October 24

Zhiguo He, Chicago Booth

"Debt and Creative Destruction: Why is Subsidizing Corporate Debt Optimal?" (with Gregor Matvos)

 

Abstract:

We present a theory that rationalizes the government subsidy to corporate debt financing. Two firms compete for survival in a declining industry in a two dimensional war of attrition, in which one dimension, financing, is endogenous. The conflict of interest between equity and debt-holders is socially desirable by expediting firm exit. Individual firms internalize the cost of this conflict, but not its benefit, which accrues to the surviving firm. Debt financing therefore exhibits positive externalities: in the second best solution the social planner subsidizes debt and therefore the conflict of interest. Our theory also explains why the debt tax shield is implemented as a corporate tax deduction and why IRS considers “conflict of interest” as one
of the key determinants in identifying securities that are qualifoed for tax-benefit.

Here's a link to the paper

 

 

October 31

Bard Harstad, Northwestern University

"The Market for Conservation and Other Hostage"

 

Abstract:

A conservation good, such as the rainforest, is a hostage: it is possessed by S who may prefer to consume it, but B receives a larger value from continued conservation. A range of prices would make trade mutually beneficial. So, why doesn’t B purchase conservation, or the forest, from S?

 

If this were an equilibrium, S would never consume, anticipating a higher price at the next stage. Anticipating this, B prefers to deviate and not pay. The Markov-perfect equilibria are in mixed strategies, implying that the good is consumed (or the forest is cut) at a positive rate. If conservation is more valuable, it is less likely to occur. If there are several interested buyers, cutting increases. If S sets the price and players are patient, the forest disappears with probability one.

 

A rental market has similar properties. By comparison, a rental market dominates a sale market if the value of conservation is low, the consumption value high, and if remote protection is costly. Thus, the theory can explain why optimal conser vation does not always occur and why conservation abroad is rented, while domestic conservation is bought.

Here's a link to the paper

 

 

November 7

Uday Shanbhag, University of Illinois at Urbana-Champaign

"Learning Parameters and Equilibria in Noise-Corrupted Cournot Games with Misspecified Price Functions" (with Jao Jiang and Sean Meyn)

 

Abstract:

We consider an oligopolistic setting in which myopic firms compete in a repeated Nash-Cournot game.
In accordance with the Cournot assumption, prices are set based on aggregate output levels. We develop
distributed learning schemes in a regime where firms are ignorant of a complete specification of an affine
price function; specifically, firms learn the equilibrium strategy and correct the misspecification in the price
function by simultaneously incorporating noise-corrupted observations and demand function. Differentiated
by informational assumptions, two sets of schemes are developed and their performance is demonstrated on a networked Nash-Cournot game:

 

(1) Learning under common knowledge with unobservable aggregate output: Here, payoff
functions and strategy sets are public knowledge (a common knowledge assumption) but aggregate output
is unobservable. When firms may observe noise-corrupted prices, distributed best response schemes are
developed which allow for simultaneously learning the equilibrium strategy and the misspecified parameter
in an almost-sure sense. Furthermore, these statements may be extended to accommodate nonlinear
generalizations of the demand function.

 

(2) Learning without common knowledge with observable aggregate output: Here, we consider two sets of schemes, which differ based on the timescale at which prices adjust. If prices respond at a slow timescale, then firms reach an equilibrium based on an incorrect belief. This sequence of equilibria is shown to converge to the true Nash-Cournot equilibrium in an almost-sure sense and every firm learns the correct value of the misspecified parameter. Alternately, when prices adjust at a faster timescale, a distributed gradient-based scheme is proposed, again allowing for analogous statements.

Here's a link to the paper

 

November 14

Jason Hartline, Northwestern University

"Optimal Platform Design" (with Tim Roughgarden)

 

Abstract:

An auction house cannot generally provide the optimal auction technology to every client.  Instead they provide one or several auction technologies, and clients select the most appropriate (e.g., eBay provides ascending auctions or "buy-it-now" pricing).  For each client the offered technology may not be optimal, but it would be too costly for clients to create their own.  We call these mechanisms, which emphasize generality rather than optimality, platform mechanisms.  A platform mechanism will  be adopted by a client if it performance exceeds that of the client's outside option, e.g., hiring (at an exogenous cost) a consultant to design the optimal mechanism.  We ask two related questions.  First, for what costs of the outside option will the platform be universally adopted?  Second, what is the structure of good (optimal) platform mechanisms?  To answer these questions we will take a prior-free viewpoint on optimal mechanism design and look at mechanisms that are approximately optimal independent of any prior.

Here is a link to the paper

 

 

November 21

No Meeting

 

 

November 28

No Meeting

 

 

December 5, 2011

Xavier Gabaix, New York University

"Game Theory with Sparsity-Based Bounded Rationality"

 

Abstract:

This paper proposes a way to enrich traditional game theory via an element of bounded rationality. It builds on previous work by the author in the context of one-agent decision problems, but extends it to several players and a generalization of the concept of Nash equilibrium. Each decision maker builds a simplified representation of the world, which includes only a partial understanding of the equilibrium play of the other agents. The agents’ desire for simplificity is modeled as “sparsity” in a tractable manner. The paper formulates the model in the concept of one-shot games, and extends it to sequential games and Bayesian games. It applies the model to a variety of exemplary games: p-beauty contests, matching pennies, centipede, traveler’s dilemma, and dollar auction games. The model’s predictions are congruent with salient facts of the experimental evidence. Compared to previous succesful proposals (e.g., models with different levels of thinking or noisy decision making), the model is particularly tractable and yields simple
closed forms where none were available. A sparsity-based approach gives a portable and parsimonious way to inject bounded rationality into models with strategic agents.

Here's a link to the paper

 

 

 

Archives of Past Workshops:

Looking for information about previous workshops? We maintain a partial archive of schedules and papers beginning in the fall of 2005. Please note that in most cases the archived papers have been significantly revised or published.

Go to archives.