Market Design Economics

In the first part of the final paper, you overview the auction theory and matching theory. In particular, you must verbally discuss all of the following topics (you may add more, of course): Auctions Efficiency of auctions, including optimal auctions Revenue of auctions, including optimal auctions Strategy-proofness of auctions, including optimal auctions Winner’s curse and how to overcome/mitigate it Auctions with multiple items How the VCG mechanism is relevant to the auctions  Matching Stable mechanisms Stability as fairness Different efficiency concepts, and how these efficiency concepts differ from the one used for auctions Strategy-proofness of matching mechanisms How matching problems differ from auction problems I do not expect you to use any math. Indeed, I discourage any use of math. I see whether you can explain the theory of auctions and matching in your words. [Added 12/17] However, I do not penalize any moderate use of math, and it is understandable and natural to use some math when providing details of the theory. The grade for this part is based on how detailed your explanations are and how logically clearly you present your ideas. For example, merely listing facts without a clear logical organization may not earn a good score. Also, inaccurate or contradicting statements are to be ignored.   In the latter half, you find an example of allocation problems and discuss the applicability of auctions or matching. You must propose a new allocation mechanism (either an auction or matching) from the mechanisms that you learned in the latter half of this course. If necessary, you may propose a variant of them, after my approval. You explain why the introduction of the new mechanism may bring some benefit and why you did not choose other mechanisms. The field of market design is about constructing market mechanisms for problems that do not have well-functioning markets. In some problems, markets do not exist at all. For this nature, in this assignment, you may be very adventurous. For example, you may suggest to apply a matching mechanism to allocate CEOs to companies. However, do not propose any unethical applications of auction or matching mechanisms (such as efficient allocation of addictive and illegal substances and auctioning exam-cheating technologies). This part is quite open-ended, but your discussion must be mostly built upon the theories of auctions and matching you have learned. I appreciate your own thoughts, but the exposition of your thoughts must be, at least partly, supported by academic knowledge you acquired through this course. The grading for this part is based on the following factors: How detailed the description of the problem is How academically “convincingly” (see below) the student describe the benefit.  How academically “convincingly” the student distinguishes the chosen mechanism from other potential mechanisms.  How many such other potential mechanisms are discussed. (At least two, one from auctions and another from matching.) I understand that students may not come up with perfect examples so that they may not be able to provide perfectly convincing arguments. I thus do not grade whether the argument is realistic or not. I rather see how many findings presented in this course students try to apply to the problem. (For example, you may find a lot of realistic reasons not to do apply the deferred acceptance mechanism to the matching of CEOs and companies. However, you should ignore all the nay-saying ideas and just support your main idea by using the academic findings presented in this course.)

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