Periodic Reporting for period 2 - Simplicity (Simplicity and Market Design)
Reporting period: 2024-01-01 to 2025-06-30
Simplicity plays a key role in market design. It lowers costs, alleviates consequences of inequalities, and encourages participation in markets and other institutions while facilitating their evaluation.
This EU-funded project addresses the following questions: Why are actual contracts and market mechanisms often simpler than our theoretical predictions (the simplicity puzzle)? Which contracts and markets are simple? How can we compare the simplicity of contracts and markets? What are the trade-offs between simplicity and other objectives such as welfare, fairness, or revenue? The project’s further goals include developing a behaviorally-grounded approach to market design and new practical market mechanisms and institutions, e.g. for the assignment of scarce public resources and the sale of pollution permits and government securities.
The project has three complementary parts: (1) to address the simplicity puzzle and develop a novel approach to contracting and mechanism design that takes into account perception errors; (2) to operationalize what simplicity means and how various mechanisms, contracts, and games can be compared in terms of their simplicity; and (3) to explore the trade-offs between simplicity and welfare-and-revenue criteria, and to develop new practical market mechanisms.
This EU-funded project addresses the following questions: Why are actual contracts and market mechanisms often simpler than our theoretical predictions (the simplicity puzzle)? Which contracts and markets are simple? How can we compare the simplicity of contracts and markets? What are the trade-offs between simplicity and other objectives such as welfare, fairness, or revenue? The project’s further goals include developing a behaviorally-grounded approach to market design and new practical market mechanisms and institutions, e.g. for the assignment of scarce public resources and the sale of pollution permits and government securities.
The project has three complementary parts: (1) to address the simplicity puzzle and develop a novel approach to contracting and mechanism design that takes into account perception errors; (2) to operationalize what simplicity means and how various mechanisms, contracts, and games can be compared in terms of their simplicity; and (3) to explore the trade-offs between simplicity and welfare-and-revenue criteria, and to develop new practical market mechanisms.
My team’s and our co-authors’ work on Part 1 led to several papers exploring the imprecision in perception and coding of what one sees, what determines the information seen, and the resulting impact on markets and their design. For instance, we have shown that in many markets simple cost comparisons rather than intricate informational considerations determine what market participants see. These costs determine the performance of the market and allow us to explain two empirical puzzles: the privacy paradox and the lack of disclosure. While designers and regulators cannot control information by assigning property rights they can do so by affecting the costs of information/perception choices, e.g. by setting up default information structures.
Our work on Part 2 led to papers defining simplicity of mechanisms, operationalizing comparisons of mechanisms in terms of their simplicity, and delineating classes of simple mechanisms. As an application, we showed that Random Priority is the sole simple, efficient, and fair mechanism, resolving a long-standing central conjecture in market design without transfers. We also show that ordinal simplicity is necessary if the designer wants the mechanism to be straightforward to play.
Our work on Part 3 developed a new methodology that radically simplifies designing pay-as-bid auctions. This new methodology allows one to design the government debt auctions so as to minimize the government expenditure on servicing its debt. It also allows designing the pollution permit auctions so as to maximize the societal welfare. Our other working papers evaluate the efficiency loss (or lack thereof) from restricting attention to simple mechanism. For instance, we show that in the presence of risk aversion or wealth effects simple mechanisms might achieve ex post efficient bilateral trade among informed parties, overturning the long-standing intuition that such efficiency is impossible.
Our work on Part 2 led to papers defining simplicity of mechanisms, operationalizing comparisons of mechanisms in terms of their simplicity, and delineating classes of simple mechanisms. As an application, we showed that Random Priority is the sole simple, efficient, and fair mechanism, resolving a long-standing central conjecture in market design without transfers. We also show that ordinal simplicity is necessary if the designer wants the mechanism to be straightforward to play.
Our work on Part 3 developed a new methodology that radically simplifies designing pay-as-bid auctions. This new methodology allows one to design the government debt auctions so as to minimize the government expenditure on servicing its debt. It also allows designing the pollution permit auctions so as to maximize the societal welfare. Our other working papers evaluate the efficiency loss (or lack thereof) from restricting attention to simple mechanism. For instance, we show that in the presence of risk aversion or wealth effects simple mechanisms might achieve ex post efficient bilateral trade among informed parties, overturning the long-standing intuition that such efficiency is impossible.
In summary of the progress beyond the state of the art described under “Work performed”: The new methodologies allow us to solve problems that were previously considered intractable. As applications, my team and our co-authors proposed new practical market mechanisms and explanations of empirical puzzles.
Some of these results are already published, others are available as working papers. Until the end of the project, we aim to publish further working papers, refining them in line with the feedback from editors and referees. We also plan to complete ongoing projects on simple mechanisms.
Some of these results are already published, others are available as working papers. Until the end of the project, we aim to publish further working papers, refining them in line with the feedback from editors and referees. We also plan to complete ongoing projects on simple mechanisms.