Risk-neutral sellers can extract high profits from risk-loving buyers by selling them lotteries. To limit risk-taking, gambling is heavily regulated in most countries. I show that protecting risk-loving buyers is essentially impossible.
Even if buyers are risk-loving only asymptotically, the seller can construct a non-random winner-pays auction that ensures unbounded profits. Buyers are asymptotically risk-loving, for example, when their preferences satisfy Savage's axioms or they have cumulative prospect theory preferences. The profits are unbounded even if the seller cannot use any mechanism that resembles a lottery. Asymptotically risk-loving preferences are both sufficient and necessary for unbounded profits.
We consider optimal pricing policies for airlines when passengers are
uncertain at the time of ticketing of their eventual willingness to pay for
air travel. Auctions at the time of departure efficiently allocate space and a
profit maximizing airline can capitalize on these gains by overbooking flights
and repurchasing excess tickets from those passengers whose realized value is
low. Nevertheless profit maximization entails distortions away from the
efficient allocation. Under standard regularity conditions we show that the
optimal mechanism can be implemented by a modified double auction.
In order to encourage early booking, passengers who
purchase late are disadvantaged. In order to capture the information rents of
passengers with high expected values, ticket repurchases at the time of
departure are at a subsidized price, sometimes leading to unused capacity.
I study a repeated mechanism design problem where a revenue-maximizing monopolist sells a fixed number of service slots to randomly arriving buyers with private values and increasing exit rates.
In addition to characterizing the fully optimal mechanism, I study the optimal mechanisms in two restricted classes. First, the pure calendar mechanism, where the seller allocates future service dates instead of general promises. The unique optimal pure calendar mechanism is characterized in terms of the opportunity costs of allocating additional service slots. Second, I analyze the waiting list mechanism, where promises of delayed service can depend on future arrivals, but the seller cannot discriminate among buyers who are offered the same position in the waiting list. Both the waiting list and the fully optimal mechanism are implemented by non-standard auctions with a scoring rule where the distance between buyers' bids affects the allocation. A novel property of these auctions is that for buyers it is better to win by a close margin and it is worse to lose by a close margin. Finally, I model partial commitment power as a penalty that the seller has to pay when forfeiting a promise. All the results are given for general partial commitment and therefore include full commitment and no commitment as special cases.
International Journal of Industrial Organization, 2016, 48: 59-87.
First version: May 2009
From 2012-2014 was circulated under the title "Penny Auctions are Unpredictable
This paper studies penny auctions, a novel auction format in which every bid increases the price by a small amount, but placing a bid is costly. Outcomes of real-life penny auctions are often surprising. Even when selling cash, the seller may obtain revenue that is much higher or lower than its nominal value, and losers in an auction sometimes pay much more than the winner.
This paper characterizes all symmetric Markov-perfect equilibria of penny auctions and studies penny auctions' properties. The results show that a high variance of outcomes is a natural property of the penny auction format and high revenues are inconsistent with rational risk-neutral participants.
In this paper, I study dynamic common-value contests.
Agents arrive over time and expend efforts to compete for prizes that are allocated proportionally according to efforts exerted.
This model can be applied to a number of examples, including rent-seeking, lobbying, advertising, and R&D competitions.
I provide a full characterization of equilibria in dynamic common-value contests and use it to study their properties,
including comparative statics, earlier-mover advantage, and large contests.
I show that information about other players' efforts plays an important role in determining the total effort and
that the total effort is strictly increasing with the information that becomes available.
We document a causal influence of online user-generated information on real-world economic outcomes. In particular, we conduct a randomized field experiment to test whether additional information on Wikipedia about cities affects tourists' choices of overnight visits. Our treatment of adding information to Wikipedia increases overnight visits by 9% during the tourist season. The impact comes mostly from improving the shorter and incomplete pages in Wikipedia.
Work in Progress
Optimal mechanisms with risk-loving agents
People in positions with formal authority are often expected to make better decisions
and fewer mistakes, and therefore their opinions and contributions are given higher
weight. This can be an equilibrium effect: people may be selected to the positions
with formal authority because of their knowledge or skills. But respect for authority
could also be a behavioral bias. These two explanations have very different implications.
Our goal is to measure the authority bias, which we define as the difference between
perceived and true quality of contributions by people with formal authority. Identifying
the authority bias is complicated by the fact that almost always the observable outcomes
include both explanations. We propose a method of identifying the authority bias that
allows us to separate it from the equilibrium effect. We estimate the authority bias
using a novel dataset from Wikipedia. In Wikipedia, editors in high-rank positions are
treated differently, and there is high regional variation. Our preliminary estimation
results indicate that the authority bias does not exist in Western Europe, but is large in
Eastern Europe. The authority bias more than doubles the time needed for the mistakes
made by high-rank editors in Eastern Europe to be corrected.