“Expropriation: A Mechanism Design Approach”
Coautoreado con Nicolás Figueroa y Juan-Pablo Montero (PUC-Economía)
Abstract: We consider a buyer that needs to purchase a fixed amount of units from multiple firms privately informed about their costs. We characterize the cost minimizing mechanism, whose practical implementation turns out to be difficult. We then fully characterize two sequential mechanisms that are easily implementable: the optimal sequential posted prices scheme and a novel optimal non-linear sequential mechanism. Through extensive numerical simulations, we show that the latter closely approximates the expected cost of the optimal mechanism, while linear prices perform much worse. Finally, we establish a decomposition result, which allows us to characterize the forces behind the performance of these mechanisms. Even if a lump-sum payment is added to linear prices, its performance is still bad, showing the need for non-linear mechanisms. Our results have natural applications to the problem of buying energy form generators and buying back pollution permits in order to meet international agreements. We finally show that a mechanism typically used in these settings, uniform pricing or “pay-as-clear”, performs quite badly when costs are convex.
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