AØKK08201U Mechanism design

Volume 2015/2016
Education

Elective at MSc in Economics

Content

Usually economists are interested in how individuals and organizations behave within their environment. For example, we ask how many hours an individual will work if he faces a certain tax system (the tax system and his employment possibilities are then the environment) or we ask how many units a firm will produce given the market environment (i.e. given the number of competitors, the mode of competition and the demand). Mechanism design goes one step further and asks: What kind of environment should a "designer" create if he wants to achieve a certain goal. For example, mechanism design asks: How should a government that is concerned about its citizens welfare design the tax schedule? In the second example, mechanism design could answer the question: How should a welfare maximizing planner organize a market?

Mechanism design is, therefore, an approach that can be used and has been used in many subfields of economics.

You can find a more thorough description of mechanism design on:

http://www.tseconomist.com/1/post/2013/01/-mechanism-design-theory-takuro-yamashita.html

 This course consists of three parts (minor deviations from the following might be possible).

The first part (based on chapter 23 in MasColell/Whinston/Greene) introduces the students to the classic results and methods of mechanism design. After some introductory examples, dominant strategy mechanism design is treated: This covers the revelation mechanism and continues with the Gibbard-Satterthwaite theorem and the Groves-Clarke mechanism. We show that the designer can only achieve his objectives with the Groves-Clarke mechanism if he is willing to pay/receive own money to/from the players. As this is not always realistic, we turn from dominant strategy to Bayesian mechanism design to see whether we can get around this problem of "budget balance". The expected externality mechanism gives a positive answer to this question if players can be forced to participate in the mechanism.

We talk about some technical questions concerning incentive compatibility and use these new tools to establish the famous Myerson-Satterthwaite theorem which says that fully efficient trade cannot be achieved by any mechanism if players can opt not to participate. This naturally leads to the question which mechanism is most efficient. We study this question of optimal Bayesian mechanisms in several settings including bargaining, pricing, regulation and auctions.

 The second part applies and extends the concepts of the first part. The material is based mainly on published papers and small excerpts from other textbooks. We analyze how optimal mechanisms are affected if the setup differs from the classical mechanism design setup. Some of the following deviations from the standard setup are considered: Agents exert externalities on each other (e.g. if Pakistan sells nuclear weapons to North Korea, US security is affected), agents' information is correlated (e.g. if a government sells drilling rights either all companies will value the right highly if there is a lot of oil and not so highly if there is none) and discuss robust mechanism design.

 The (short) third part deals with recent, applied work of economists on so called matching markets. The classic Gale-Shapley algorithm is introduced. We then use this tool (and some related tools like the top cycle algorithm) to think about the design of the markets like matching students to schools/universities.

 Students are expected to do some assigned reading and smaller exercises between classes.

Learning Outcome

At the end of this course, students can apply the classical tools of mechanism design. Students can explain the advantages and disadvantages of dominant vs. Bayesian mechanism design and the limitations to both approaches. Students understand the logic behind the revelation principle, the Clarke-Groves mechanism, the expected externality mechanism, the envelope theorem and monotonicity condition, the Myerson-Satterthwaite theorem, the Cremer-McLean mechanism and the agenda of robust mechanism design. Students can derive optimal Bayesian mechanisms in well behaved settings and apply matching algorithms to fully specified problems. Very good students can analyze a given (matching) mechanism, find and illustrate its weaknesses and suggest alternatives based on mechanisms treated in the course.  Students can read, summarize, compare and comment on research papers that use the techniques covered in the course.

 

Reading list:

Mas-Colell, Andreu, Michael Dennis Whinston, and Jerry R. Green. Microeconomic theory. New York: Oxford University Press, 1995. only chapter 23

Tilman Börgers. An Introduction to the Theory of Mechanism Design, New York: Oxford University Press, 2015. only chapters 6.4 and 10

the list of papers and textbook excerpts is tentative: some papers will probably be skipped while few other papers might be assigned during the course. Most papers do not have to be read completely and precise instructions (which pages) will be given in the course.

Moldovanu, Benny, and Aner Sela. "The optimal allocation of prizes in contests." The American Economic Review (2001): 542-558.

Jehiel, Philippe, Benny Moldovanu, and Ennio Stacchetti. "How (not) to sell nuclear weapons." The American Economic Review (1996): 814-829.

Cremer, Jacques, and Richard P. McLean. "Full extraction of the surplus in Bayesian and dominant strategy auctions." Econometrica (1988): 1247-1257

Martimort, David, and Lars Stole. "Market participation in delegated and intrinsic common‐agency games." The Rand Journal of Economics 40.1 (2009): 78-102.

Bolton, Patrick, and Mathias Dewatripont. Contract theory. The MIT Press, 2005. only ch. 6.1

Bergemann, Dirk, and Stephen Morris. "Robust mechanism design." Econometrica 73.6 (2005): 1771-1813.

Gale, David, and Lloyd S. Shapley. "College admissions and the stability of marriage." The American Mathematical Monthly 69.1 (1962): 9-15.

Roth, Alvin E. "The economist as engineer: Game theory, experimentation, and computation as tools for design economics." Econometrica 70.4 (2002): 1341-1378.

Roth, Alvin E. "What Have We Learned from Market Design?." The Economic Journal 118.527 (2008): 285-310.

Abdulkadiroğlu, Atila, and Tayfun Sönmez. "School choice: A mechanism design approach." The American Economic Review (2003): 729-747.

Mathematics A and B from the BSc in Economics. Active knowledge of the material in Microeconomics III (Microeconomics C) and that the course has been followed prior taking Mechanism Design. Likewise it is recommended to follow or have followed “Contract Theory and the Economics of Organization” and “Game Theory”.
3 hours of lectures per week for 14 weeks.

Time and room:
For time and classroom please press the link under "Se skema"(See schedule) at the right side of this page (15E means Autumn 2015, 16F means Spring 2016).

You can find the similar information partly in English at
https:/​/​skema.ku.dk/​ku1516/​uk/​module.htm
-Select Department: “2200-Økonomisk Institut” (and wait for respond)
-Select Module:: “2200-F16;Mechanism Design”
-Select Period: “Forår/Spring – Weeks 4-29”
-Press: “ View Timetable”
  • Category
  • Hours
  • Exam
  • 49
  • Lectures
  • 42
  • Preparation
  • 115
  • Total
  • 206
Credit
7,5 ECTS
Type of assessment
Written examination, 7 days
The exam is a one week take home assignment.
Exam registration requirements

In order to be allowed to take the exam, students have to pass a midterm assignment which is also a one week take home assignment.

Aid
All aids allowed
Marking scale
7-point grading scale
Censorship form
External censorship
100 % censurship
Exam period

The exam takes place May 21 at 10am to May 28 at 10am, 2016.

For enrolled students more information about examination, exam/re-sit, rules etc. is available at the student intranet for Examination (English) and student intranet for Examination (KA-Danish).

Re-exam

The exam takes place August 27 at 10am to September 3 at 10am, 2016.

If only a few students have registered for the re-exam, the exam might change to an oral exam including the date for the exam, which will be informed  by the Examination Office.

Criteria for exam assesment

The student must in a satisfactory way demonstrate that he/she has mastered the learning outcome of the course..