Inequality-aware market design

Info: 

Inequality-aware Market Design -- an ERC Starting Grant funded by the European Commission -- provides a novel way to address the growing problem of inequality in market-design settings. The redistributive objective distinguishes this theory from the traditional mechanism-design literature that has focused predominantly on efficiency and revenue as design goals; the focus on optimal allocation rules in a single marketplace complements the public-finance approach to redistribution through the tax system. IMD provides policy guidance by explaining whether and how policymakers concerned about inequality should resort to distortionary market interventions.

Policymakers often introduce rules constraining transactions in individual markets—such as rent control—or even choose to distribute scarce resources by circumventing markets completely, as is frequently the case for health care or transit. Yet, traditional economic intuition opposes these sorts of policies because—unlike well-functioning markets—they introduce allocative inefficiency.

In this project, we explore the optimal design of marketplaces in the presence of underlying inequalities between participants, developing a theory of Inequality-aware Market Design (IMD). The approach is to deploy a mechanism-design framework that identifies the optimal way to structure the market. In the baseline framework, the designer maximizes a welfare function whose welfare weights reflect her redistributive preferences induced by the inequalities between participants. Market participants may have private information both about their willingness to trade and their welfare weights.

Research focuses on testing the validity and scope of the main hypothesis: When inequalities are sufficiently pronounced and can be detected based on agents’ behavior in the market, it becomes optimal to sacrifice allocative efficiency to achieve a more desirable split of surplus. For example, as shown in our first paper on the topic (Dworczak ® Akbarpour ® Kominers, 2021), optimal market designs may involve inefficient rationing.

 

 

 

 

 

 

 

 

 

 


       

Budget: 

Źródło finansowania | Financing: European Commission through ERC Starting Grant (GA #101040122)

Projekt realizowany | Timeline: 07/2022 -- 07/2027

Kierownik | Principal Investigator: Piotr Dworczak

Budżet łączny | Total budget: 1 191 561 EUR

  • wynagrodzenia dla podstawowych wykonawców | compensation to researchers: 647 000 EUR
  • stypendia dla młodych badaczy | scholarships for young scholars: 153 200 EUR
  • komputery i oprogramowanie | hardware and software: 9 044 EUR
  • konferencje i inne wyjazdy | conference travels: 141 205 EUR
  • materiały i usługi obce | usables and outsourced services: 74 122 EUR
  • koszty pośrednie dla FAME | overheads for FAME: 236 000 EUR

ERC Starting Grant.jpg

Purpose: 

The IMD project has two key objectives. The first and leading objective is to develop a comprehensive theory of Inequality-aware Market Design (IMD). We will study the question of optimal redistribution in the framework of mechanism design. This approach marries the equity-efficiency trade-off (extensively analyzed in the public-finance literature) with the focus on the design of a single marketplace in the tradition of market and mechanism design. The optimal redistribution question is posed by assuming that the designer's objective function includes social welfare weights that can depend on agents' observed and unobserved characteristics. The social welfare weights allow the designer to account for the consequences of inequalities between market participants; their inclusion sets the framework apart from the traditional mechanism-design analysis which has been, with notable exceptions discussed below, oblivious to these inherent inequalities.

The second, complementary objective is to establish IMD as an emerging field within economic theory by actively building the research community, promoting its importance, and creating links to neighboring research areas. On top of developing the theory, we will engage in activities aimed at establishing IMD as a new area within economic theory, with strong connections to existing research communities. The strategy to achieve this objective consists of two sets of activities, derived naturally from the fact that IMD lies at the intersection of two fields, mechanism design and public finance.

Mohammad Akbarpour, Graduate School of Business, Stanford University 
Eric Budish, Booth School of Business, University of Chicago
large_Kominers_headshot_2016_square_0.jpg Scott Duke Kominers, Entrepreneurial Management Unit, Harvard Business School; Harvard Department of Economics; Harvard Center of Mathematical Sciences and Applications; a16z crypto 
Shengwu Li, Economics Department, Harvard University

Opublikowane | Published

  • Redistribution through Markets | Econometrica

    Policymakers frequently use price regulations as a response to inequality in the markets they control. In this paper, we examine the optimal structure of such policies from the perspective of mechanism design. We study a buyer-seller market in which agents have private information about both their valuations for an indivisible object and their marginal utilities for money. The planner seeks a mechanism that maximizes agents’ total utilities, subject to incentive and market-clearing constraints. We uncover the constrained Pareto frontier by identifying the optimal trade-off between allocative efficiency and redistribution. We find that competitive-equilibrium allocation is not always optimal. Instead, when there is substantial inequality across sides of the market, the optimal design uses a tax-like mechanism, introducing a wedge between the buyer and seller prices, and redistributing the resulting surplus to the poorer side of the market via lump-sum payments. When there is significant within-side inequality, meanwhile, it may be optimal to impose price controls even though doing so induces rationing.

    Piotr
    Dworczak

W toku | Work in progress

  • An economic framework for vaccine prioritization

    We propose an economic framework for determining the optimal allocation of a scarce supply of vaccines that become gradually available during a public health crisis, such as the Covid-19 pandemic. Agents differ in observable and unobservable characteristics, and the designer maximizes a social welfare function over all feasible mechanisms—accounting for agents’ characteristics, as well as their endogenous behavior in the face of the pandemic. The framework emphasizes the role of externalities and incorporates equity as well as efficiency concerns. Our results provide an economic justification for providing vaccines immediately and for free to some groups of agents, while at the same time showing that a carefully constructed pricing mechanism can improve outcomes by screening for individuals with the highest private and social benefits of receiving the vaccine. The solution casts light on the classic question of whether prices or priorities should be used to allocate scarce public resources under externalities and equity concerns.

    Piotr
    Dworczak
  • Redistributive allocation mechanisms

    Many scarce public resources are allocated below market-clearing prices (and sometimes for free). Such "non-market" mechanisms necessarily sacrifice some surplus, yet they can potentially improve equity by increasing the rents enjoyed by agents with low willingness to pay. In this paper, we develop a model of mechanism design with redistributive concerns. Agents are characterized by a privately observed willingness to pay for quality, and a publicly observed label. A market designer controls allocation and pricing of a set of objects of heterogeneous quality, and maximizes a linear combination of revenue and total surplus| with Pareto weights that depend both on observed and unobserved agent characteristics. We derive structural insights about the form of the optimal mechanism and describe how social preferences influence the use of non-market mechanisms.

    Piotr
    Dworczak

The IMD seminar is a series of talks by researchers from various fields (market and mechanism design, public finance, development economics, industrial organization) interested in understanding how markets should be designed in the presence of systematic inequalities among the participants. The seminar has an interdisciplinary character and features both theoretical and empirical papers. 

 

The IMD seminar is a biweekly event taking place in hybrid format. If you would like to be added to our mailing list (and obtain the Zoom link), please email IMD@grape.org.pl or fill out the sign-up form.

 

We're meeting on Wednesdays at 5pm CET (11am EST/ 8am PST)

 

Scheduled talks:

10 August 2022: Zi Yang Kang (Stanford University), "Optimal Redistribution Through Public Provision of Private Goods"

Abstract: How does a private market influence the optimal design of a public program? In this paper, I study a designer who has preferences over how a public option and a private good are allocated. However, she can design only the public option. Her design affects the distribution of consumers who purchase the private good—and hence equilibrium outcomes. I characterize the optimal mechanism and show how it can be computed explicitly. I derive comparative statics on the value of the public option and show that the optimal mechanism generally rations the public option. Finally, I examine implications on the optimal design when the designer can intervene in the private market or introduce an individual mandate.

24 August 2022: Philipp Strack (Yale University), "Taxing Externalities without Hurting the Poor"

Abstract: We consider the optimal taxation of a good which exhibits a negative externality,in a setting where agents differ in their value for the good, their disutility for the externality and their value for money, and the planner observes neither. Pigouvian taxation is the unique Pareto efficient mechanism, but corresponds to the planner putting higher welfare weights on agents who are richer. We derive the optimal tax schedule for both a narrow allocative objective and a utilitarian objective for the planner. The optimal mechanism might take a ``non-market'' form and cap consumption, or forbid it altogether. The optimal mechanism is generically non-linear, and Pareto-inefficient.

7 September 2022: TBA

21 September 2022: Lucie Gadenne (Warwick University), "In-Kind Transfers as Insurance"

TBA: Kate Smith (LSE; IFS)

 

 


Past talks:

27 July 2022: Pawel Doligalski (University of Bristol; GRAPE), "Redistribution with Performance Pay

EC’22 Tutorial: Redistributive Market Design

by Mohammad Akbarpour, Piotr Dworczak, and Scott Duke Kominers

 

Brief description: Many scarce public resources are allocated at below-market-clearing prices—and sometimes for free. Such “non-market” mechanisms necessarily sacrifice some surplus, yet they can potentially improve equity. In this tutorial, we show how tools that have been developed in the past 40 years in mechanism design theory can be employed to identify the optimal structure of such redistributive policies. This work sheds light on how and when it may make sense to use non-market allocation systems, such as rationing and priority mechanisms.

Decades of mechanism design theory has almost exclusively focused on “revenue" or "efficiency" maximization, and a large body of such studies have been presented at EC. In practice, however, policymakers frequently design allocation mechanisms to address “inequality" in the markets they control. We will show how mechanism design theory can be oriented around equity in addition to efficiency—resulting in strikingly different prescriptions for the optimal mechanism.


Target audience: Graduate students, researchers, and advanced undergraduate students.

Prerequisites: The tutorial will assume basic familiarity with mechanism design. Some background on redistributive policy design will be helpful, but not essential

 

 

Structure of the tutorial:

Part I

  1. Introduction, motivation, basis ideas (Scott, 15 minutes)
  2. What's the optimal price in a market with inequality? (Mohammad, 30 minutes)

Part II

  1. A mechanism-design approach (Piotr, 30 minutes)
  2. Conclusions, future directions, open problems (Scott, 15 minutes)

 

Key references:

 

Classical references:

  • Akerlof, G. A. (1978): "The Economics of "Tagging" as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning," American Economic Review, 68, 8--19.
  • Atkinson, A. B. and J. E. Stiglitz (1976): "The design of tax structure: direct versus indirect taxation," Journal of Public Economics, 6, 55--75.
  • Besley, T. and S. Coate (1991): "Public provision of private goods and the redistribution of income," The American Economic Review, 81, 979--984.
  • Blackorby, C. and D. Donaldson (1988): "Cash versus kind, self-selection, and efficient transfers," The American Economic Review, 691--700.
  • Che, Y.-K., I. Gale, and J. Kim (2013b): "Assigning resources to budget-constrained agents," Review of Economic Studies, 80, 73--107.
  • Condorelli, D. (2012): "What money can't buy: Efficient mechanism design with costly signals," Games and Economic Behavior, 75, 613--624.
  • Currie, J. and F. Gahvari (2008): "Transfers in cash and in-kind: Theory meets the data," Journal of Economic Literature, 46, 333--83.
  • Diamond, P. A. and J. A. Mirrlees (1971): "Optimal taxation and public production I: Production efficiency," American Economic Review, 61, 8--27.
  • Gahvari, F. and E. Mattos (2007): "Conditional cash transfers, public provision of private goods, and income redistribution," American Economic Review, 97, 491--502.
  • Hartline, J. D. and T. Roughgarden (2008): "Optimal mechanism design and money burning," in Proceedings of the Fortieth Annual ACM Symposium on Theory of Computing, 75--84.
  • Nichols, A. L. and R. J. Zeckhauser (1982): "Targeting transfers through restrictions on recipients," The American Economic Review, 72, 372--377.

 

New developments:

  • Akbarpour, M. ® E. Budish ® P. Dworczak ® S. D. Kominers (2021): "An economic framework for vaccine prioritization"
  • Fan, X., Y.-J. Chen, and C. S. Tang (2021): "Allocating Scarce Resources in the Presence of Private Information and Bargaining Power," HKUST Business School Research Paper No. 2021-021.
  • Kang, M. and C. Z. Zheng (2020): "Pareto Optimality of Allocating the Bad," Working paper.
  • Kang, M. and C. Z. Zheng (2022): "Optimal Design for Redistributions among Endogenous Buyers and Sellers," working paper
  • Kang, Z. Y. (2020a): "Markets for goods with externalities," Working Paper.
  • Kang, Z. Y. (2020b): "Optimal public provision of private goods," Working Paper.
  • Matsushima, H. (2021), "Auctions with Ethical Concerns," Working Paper
  • Reuter, M. and C.-C. Groh (2020): "Mechanism Design for Unequal Societies," Available at SSRN 3688376.
  • Roy, A., Rehbeck J. (2021), "Obstacles to Redistribution Through Markets and One Solution," Working paper

 

Related techniques:

  • Ashlagi, I., F. Monachou, and A. Nikzad (2020): "Optimal Dynamic Allocation: Simplicity through Information Design," Available at SSRN.
  • Doval, L, Skreta, V (2021): "Constrained Information Design," Working paper
  • Kleiner, A., B. Moldovanu, and P. Strack (2021): "Extreme Points and Majorization: Economic Applications," Econometrica, 89, 1557--1593.
  • Muir, E. V. and S. Loertscher (2022): "Monopoly pricing, optimal randomization, and resale," Journal of Political Economy, 130.
  • Toikka, J. (2011): "Ironing without control," Journal of Economic Theory, 146, 2510--2526.