efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

individual behavior and bidding heterogeneity in sealed bid auctions where the number of bidders is unknown i introduction most of the work in sealed bid auction theory and related experimental work has focused on the case in which the number of bidders is known this is of course not always the case in naturally occurring environments for instance construction firms submitting bids in a sealed bid procurement auction may not know exactly how many other firms have completed the costly process of preparing and submitting a bid until bidding has closed there is a body of theory to address environments with an unknown number of bidders mcafee and mcmillan 1987 matthews 1987 harstad kagel and levin 1990 krishna 2002 1 the purpose of this article is to provide theoretical considerations and analysis of a large data set of individual bids from laboratory sealed bid auction markets in which buyers have some information about the number of rivals but not certainty 2 according to the received theory the availability of information about the number of rivals as expected directly affects bidding and therefore seller revenue in first price fp auctions but should not affect bidding in the second price sp auctions although bidding own valuation is optimal in sp auctions regardless of the number of bidders the majority of previous experimental work on auctions with known number of bidders has shown systematic deviation kagel 1995 while a few studies report coincidence with theory see isaac and james 2000b for an extended discussion earlier work on fp auctions with known number of bidders indicated systematic overbidding compared to risk neutral equilibrium risk aversion has been suggested as one of the possible explanations for observed overbidding cox roberson and smith 1982 dyer kagel and levin 1989 is the only previous experimental study looking at individual bidding in auctions where the number of bidders is unknown and their design is different from this study they look at fp auctions with restricted auction size of either six or three participants and ask subjects to submit three bids two bids for contingent bidding procedure and one bid for noncontingent bidding procedure subjects submit all three bids simultaneously and do not know at the time which procedure will be used they find overbidding in this environment compared to risk neutral nash equilibrium although we test for deviation from risk neutral bidding strategy in a more general setting our study also addresses a broader set of questions previous studies of open bid ascending silent auctions suggested that there may have been revenue loss to the sellers by bidders guarding their higher valued items that is remaining physically proximate to the bidding stations isaac and schnier 2005 the possibility that guarding was at the root of the revenue reductions was investigated by isaac and schnier 2006 who replaced the open bid ascending silent auctions with both fp and sp sealed bid auctions which is the environment studied in this article their paper reported on the aggregate revenue effects of the switch to sealed bid auctions but did not look at individual behavior it is clear that such analysis of individual bidding behavior must be informed by theories of bidding with an unknown number of rivals because such is the reality facing bidders in a multiple sealed bid silent auction context in addition data from a noncomputerized experiment closely approximating field auctions allows the analysis of possible behavioral adjustments in the field for example the attempt to guard the item and count the number of bidders such an analysis is presented in this article 3 our analysis of fp auctions contributes to the discussion about the causes of heterogeneous deviation of individual bidding from risk neutral theory cox roberson and smith 1982 and cox smith and walker 1988 reported heterogeneous bidding above risk neutral equilibrium in fp auctions for mechanisms with fixed number of bidders and palfrey and pevnitskaya 2008 for auctions with endogenous entry where the number of bidders was known at the time of submitting a bid

asymmetric bidding in second price common value auctions abstract two comparative static characterizations for common value auctions under second price rules are extended to heterogeneous bidders the willingness to pay of the two highest bidders is enhanced on average by the release of public information and best responses are less aggressive when facing more rival bidders

endogenous entry and self selection in private value auctions an experimental study this paper presents the results of an experimental study of endogenous entry in first price independent private value auctions n potential bidders simultaneously decide whether to participate in an auction or receive a known outside option in the second stage entrants submit bids after learning their own private values and the number of entrants an equilibrium model of heterogeneous risk averse bidders implies a self selection effect where bidding in the auction is lower with endogenous entry because only less risk averse bidders enter this effect is confirmed by the experiment we also observe excessive entry relative to the theoretical model

split award auctions for supplier retention to stay abreast of current supply market pricing it is common for procurement managers to frequently organize auctions among a pool of qualified suppliers the supply base sole awards can alienate losing suppliers and cause them to defect from the supply base to maintain the supply base and thereby control the high costs of finding and qualifying new suppliers buyers often employ split awards which in turn inflate purchase costs this results in a trade off that we investigate in an infinite horizon stationary setting in which the relative cost position of each supplier is randomly drawn in every period we characterize the optimal split award that minimizes long run costs purchasing and qualification and show that maintaining a constant supply base size using a qualify up to policy is optimal for the buyer we find that neither the extent of multisourcing nor the buyer s value of split awards compared with winner take all auctions are monotonic in the qualification cost and that split award auctions can increase ex ante system buyer and supplier benefits simultaneously to our knowledge this is the first paper studying split award auctions for supply base maintenance and it will hopefully galvanize further research on this important topic this paper was accepted by yossi aviv operations management

limit order book as a market for liquidity we develop a dynamic model of an order driven market populated by discretionary liquidity traders these traders must trade yet can choose the type of order and are fully strategic in their decision traders differ by their impatience less patient traders demand liquidity more patient traders provide it three equilibrium patterns are obtained the pattern is determined by three parameters the degree of impatience of the patient traders which we model as the cost of execution delay in providing liquidity their proportion in the population which determines the degree of competition among the liquidity providers and the tick size which is the cost of the minimal price improvement despite its simplicity the model generates a rich set of empirical predictions on the relation between market parameters time to execution and spreads we argue that the economic intuition of this model is so basic its main results must be robust in much more general models

minimum price variations discrete bid ask spreads and quotation sizes exchange minimum price variation regulations create discrete bid ask spreads if the minimum quotable spread exceeds the spread that otherwise would be quoted spreads will be wide and the number of shares offered at the bid and ask may be large a cross sectional discrete spread model is estimated by using intraday stock quotation spread frequencies the results are used to project 1 16 spread usage frequencies given a 1 16 tick projected changes in quotation sizes and in trade volumes are obtained from regression models for stocks priced under 10 the models predict spreads would decrease 38 percent quotation sizes would decrease 16 percent and daily volume would increase 34 percent article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

equilibrium in auctions with entry the authors model entry incentives in auctions with risk neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic the presence of too many potential bidders raises coordination costs that detract from welfare the authors show that the seller and society can benefit from policies that reduce market thickness i e the relative abundance of buyers their analysis extends well known revenue equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies e g reservation prices in ways not anticipated by models that ignore entry copyright 1994 by american economic association

auctions with a stochastic number of bidders abstract auction theory is generalized by allowing the number of bidders to be stochastic in a first price sealed bid auction with bidders having constant absolute risk aversion the expected selling price is higher when the bidders do not know how many other bidders there are than when they do know this thus the seller should conceal the number of bidders if he can moreover a bidder s ex ante expected utility is the same whether or not there is a policy of concealing the number of bidders concealment therefore pareto dominates announcement with risk neutral bidders the optimal auction is the same whether or not the bidders know who their competitors are

should we be afraid of the dark dark trading and market quality abstract we exploit a unique natural experiment recent restrictions of dark trading in canada and australia and proprietary trade level data to analyze the effects of dark trading disaggregating two types of dark trading we find that dark limit order markets are beneficial to market quality reducing quoted effective and realized spreads and increasing informational efficiency in contrast we do not find consistent evidence that dark midpoint crossing systems significantly affect market quality our results support recent theory that dark limit order markets encourage aggressive competition in liquidity provision we discuss implications for the regulation of dark trading and tick sizes

balanced bayesian mechanisms in the transferable utility case a number of authors have identified conditions on beliefs that guarantee the existence of bayesian incentive compatible mechanisms with balanced transfers we present a new easy to interpret condition and we show that it is strictly more general than all the other conditions found in the literature we also study conditions guaranteeing the bayesian implementability of all social decision rules with balanced budget mechanisms

the design of multidimensional auctions procurement auctions usually require the bid to specify several characteristics of the contract to be fulfilled in this article i study the design of such mechanisms allowing for a special case of correlation of the firm s costs i describe the properties of optimal mechanisms and study the design of multidimensional auctions contrary to the independent costs model to implement the optimal outcome the procurer will need to use a two stage auction in the first stage the procurer selects one firm in the second stage he bargains to readjust the level of quality to be provided

stock price clustering and discreteness stock prices cluster on round fractions clustering increases with price level and volatility and decreases with capitalization and transaction frequency clustering is pervasive price clustering will occur if traders use discrete price sets to simplify their negotiations exchange regulations require that most stocks be traded on eighths clustering on larger fractions will occur if traders choose to use discrete price sets based on quarters halves or whole numbers an econometric model of clustering is derived and estimated projections from the results suggest that traders would frequently use odd sixteenths when trading low price stocks if exchange regulations permitted trading on sixteenths article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

optimal auctioning and ordering in an infinite horizon inventory pricing system we consider a joint inventory pricing problem in which buyers act strategically and bid for units of a firm s product over an infinite horizon the number of bidders in each period as well as the individual bidders valuations are random but stationary over time there is a holding cost for inventory and a unit cost for ordering more stock from an outside supplier backordering is not allowed the firm must decide how to conduct its auctions and how to replenish its stock over time to maximize its profits we show that the optimal auction and replenishment policy for this problem is quite simple consisting of running a standard first price or second price auction with a fixed reserve price in each period and following an order up to basestock policy for replenishing inventory at the end of each period moreover the optimal basestock level can be easily computed we then compare this optimal basestock reserve price auction policy to a traditional basestock list price policy we prove that in the limiting case of one buyer per period and in the limiting case of a large number of buyers per period and linear holding cost list pricing is optimal list pricing also becomes optimal as the holding cost tends to zero numerical comparisons confirm these theoretical results and show that auctions provide significant benefits when 1 the number of buyers is moderate 2 holding costs are high or 3 there is high variability in the number of buyers per period

economic insights from internet auctions this paper surveys recent studies of internet auctions four main areas of research are summarized first we survey several studies that document and attempt to explain the frequently observed sniping or last second bidding behavior in these auctions second we summarize several methods proposed to quantify the distortions caused by asymmetric information in these markets most notably due to the winner s curse third we explore research about the role of reputation mechanisms installed to help combat these distortions finally we discuss what internet auctions have to teach us about auction design

imperfect competition in financial markets an empirical study of island and nasdaq the competition between island and nasdaq at the beginning of the century offers a natural laboratory to study competition between and within trading platforms and its consequences for liquidity supply our empirical strategy takes advantage of the difference between the pricing grids used on island and nasdaq as well as of the decline in the nasdaq tick using the finer grid prevailing on their market island limit order traders undercut nasdaq quotes much more than they undercut one another the drop in the nasdaq tick size triggered a drop in island spreads despite the island tick already being very thin before nasdaq decimalization we also estimate a structural model of liquidity supply and find that island limit order traders earned rents before nasdaq decimalization our results suggest that perfect competition cannot be taken for granted even on transparent open limit order books with a very thin pricing grid

a folk theorem for bayesian games with commitment the set of all bayesian nash equilibrium payoffs that the players can achieve by making conditional commitments at the interim stage of a bayesian game coincides with the set of all feasible incentive compatible and interim individually rational payoffs of the bayesian game furthermore the various equilibrium payoffs which are achieved by means of different commitment devices are also the equilibrium payoffs of a universal deterministic commitment game

costly bidding in online markets for it services internet enabled markets are becoming viable venues for procurement of professional services we investigate bidding behavior within the most active area of these early knowledge markets the market for software development these markets are important both because they provide an early view of the effectiveness of online service markets and because they have a potentially large impact on how software development services are procured and provided using auction theory we develop a theoretical model that relates market characteristics to bidding and transaction behavior taking into account costly bidding we then test our model using data from an active online market for software development services which yields contracts for 30 40 of posted projects in its current format however the studied market may induce excessive bidding by vendors consistent with our theoretical predictions and those of carr 2003 higher value projects attract significantly more bids with lower average quality greater numbers of bids raise the cost to all participants due to costly bidding and bid evaluation perhaps as a consequence higher value projects are also much less likely to be awarded

equilibrium bid functions for auctions with an uncertain number of bidders abstract the number of rivals may be unknown when a bidding strategy is formulated in an auction in a symmetric model with risk neutral bidders holding independent information we obtain explicit equilibrium bidding functions for first price and second price auctions with uncertainty about the number of rivals five auctions are revenue equivalent first price and second price auctions each with the number of bidders known or uncertain and english auctions

optimal bidding in auctions from a game theory perspective abstract the game theoretic perspective in auction bidding has provided a powerful normative framework for the analysis of auctions and it has generated an impressive volume of research contributions tracing this research we review key recent advances which have greatly expanded our understanding of the operation of auctions and produced a more accurate analysis of mechanism design and optimal bidding we follow various experimental studies which have shown that the predictive power of auction theory remains in many cases limited for this reason we concentrate on research themes which enhance the applicability of auction theory leading to more realistic descriptions of bidding behaviors we identify important innovations which expand the environment of auction bidding and carry us beyond rational decision making we conclude providing directions of future research and discussing their implications

the ex ante incentive compatible core in the absence of wealth effects in a differential information economy with quasi linear utilities monetary transfers facilitate the fulfillment of incentive compatibility constraints the associated ex ante core is generically non empty however we exhibit a wellbehaved exchange economy in which this core is empty even if goods are allocated through random mechanisms

revenue ranking of discriminatory and uniform auctions with an unknown number of bidders an important managerial question is the choice of the pricing rule we study whether this choice depends on the uncertainty about the number of participating bidders by comparing expected revenues under discriminatory and uniform pricing within an auction model with affiliated values stochastic number of bidders and linear bidding strategies we show that if uncertainty about the number of bidders is substantial then the discriminatory pricing generates higher expected revenues than the uniform pricing in particular the first price auction might generate higher revenues than the second price auction therefore uncertainty about the number of bidders is an important factor to consider when choosing the pricing rule we also study whether eliminating this uncertainty i e revealing the number of bidders is in the seller s interests and discuss the existence of an increasing symmetric equilibrium

efficiency despite mutually payoff relevant private information the finite case individuals have or observe partly private information they independently choose acts possibly including messages the center may also act individuals utilities may depend on all acts and information including others private information are there incentives depending only on public information that make desired behavior a bayesian equilibrium assume incentive payments are separable and fully transferable appropriate incentives exisit either if the center s information depends stochastically however slightly on all relevant private information or if individuals relative valuations of acts however divergent are not too dissimilarly affected by different states of nature more generally one gives necessary and sufficient conditions for existence whenever the strategy profile asks agents to reveal all private knowledge relevant to their beliefs about the center s information

decomposing liquidity along the limit order book abstract in this paper we estimate the asymmetric information and order processing components of liquidity at extended depths along the limit order book using data from the inet ecn we find that the asymmetric information component decreases as depth increases inactive stocks have more information asymmetry at the inside quotes but it decreases more rapidly along the book than for active stocks the order processing component of liquidity has fixed and variable constituents consistent with a fixed cost per order as well as a variable portion based on the size of the order

alternative common value auction procedures revenue comparisons with free entry the logic of revenue comparisons for different types of common value auctions is substantially altered if the number of participants rather than being fixed responds endogenously to the expected profitability from participating in a thoroughly symmetric model a seller may prefer that competition be indirect an auction procedure in which fewer participants are needed to drive the expected profitability from participating down to the level obtainable in other auctions in the economy can attain higher expected revenue if a sale is sufficiently likely this insight allows a complete revenue ranking of standard auction procedures with endogenous entry

design competition through multidimensional auctions this article studies design competition in government procurement by developing a model of two dimensional auctions wherefirms bid on both price and quality and bids are evaluated by a scoring rule designed by a buyer three auction schemes first score second score and second preferred offer are introduced and related to actual practices if the buyer can commit to a scoring rule in his best interest the resulting optimal scoring rule underrewards quality relative to the buyer s utility function and implements the optimal outcome for the buyer underfirst and second score auctions absent the commitment power the onlyfeasible scoring rule is the buyer s utility function under which 1 all three schemes yield the same expected utility to the buyer and 2 first and second score auctions induce the first best level of quality which turns out to be excessive from the buyer s point of view

equilibria in first price auctions with participation costs this paper characterizes the equilibria of first price auctions with participation costs in the independent private values environment bidders use cutoff strategies to decide whether they will participate in the auction it is shown that when bidders are homogeneous there always exists a unique symmetric equilibrium and further there is no other equilibrium when valuation distribution functions are inelastic when distribution functions are elastic at the symmetric equilibrium there exists an asymmetric equilibrium inelasticity elasticity includes concavity convexity of distribution functions as a special case we find similar results when bidders are heterogeneous

auctions with uncertain numbers of bidders abstract we investigate bidders and seller s responses to ambiguity about the number of bidders in the first price auction fpa and the second price auction spa with independent private valuations we model ambiguity aversion using the maxmin expected utility model we find that bidders prefer the number of bidders to be revealed in the fpa are indifferent between revealing and concealing in the spa and prefer the spa to the fpa if bidders are more pessimistic than the seller then the seller prefers to conceal the number of bidders in the fpa and prefers the fpa to the spa

auctioning supply contracts this paper studies a procurement problem with one buyer and multiple potential suppliers who hold private information about their own production costs both the purchase quantity and the price need to be determined an optimal procurement strategy for the buyer requires the buyer to first design a supply contract that specifies a payment for each possible purchase quantity and then invites the suppliers to bid for this contract the auction can be conducted in many formats such as the english auction the dutch auction the first priced sealed bid auction and the vickrey auction the winner is the supplier with the highest bid and is given the decision right for the quantity produced and delivered applying this theory to a newsvendor model with supply side competition this paper establishes a connection between the above optimal procurement strategy and a common practice in the retail industry namely the use of slotting allowances and vendor managed inventory also discussed in the newsvendor context are the role of well known supply contracts such as returns contracts and revenue sharing contracts in procurement auctions the scenarios where the buyer and suppliers may possess asymmetric information about the demand distribution and how the cost of supply demand mismatch is affected by supply side competition finally this paper compares the optimal procurement strategy with a simpler but suboptimal strategy where the buyer first determines a purchase quantity and then seeks the lowest cost supplier for the quantity in an auction

extracting market information from equity options with exponential levy processes levy processes have been successfully applied in the modeling of financial assets useful information such as implied volatility skewness and risk preferences can be derived from market option prices in this paper we advocate using esscher conjugate levy processes to estimate risk neutral and empirical densities more specifically we employ the exponential meixner and nig processes to calculate in closed form the pricing kernel in the equity market and then study the evolution of equity market behavior between 2002 and 2010 our empirical analysis using s p 500 options shows that the risk preferences of equity investors were signalling an anomaly in the market well before the subprime prime mortgage crisis august 2007 and the crisis of confidence that followed anticipating the downfall in equity markets in 2008 but then returning to normal levels in 2009

informational size and the incentive compatible coarse core in quasilinear economies abstract in this paper we show that in quasilinear economies the incentive compatible coarse core is non empty if agents are informationally small in the sense of mclean and postlewaite 2002 and the strict core in each state is non empty

incomplete information incentive compatibility and the core abstract we consider an exchange economy in which agents possess private information at the time of engaging in state contingent contracts while communication of private information is permitted the true information state is not verifiable the enforcement of contracts is therefore limited by incentive compatibility constraints we formalize a notion of the core for such an economy our analysis can be viewed as an attempt to incorporate incentive compatibility in the coarse core of r wilson 1978 econometrica46 807 816 or as an attempt to introduce coalitional contracts in the notion of incentive efficiency of b holmstrom and r myerson 1983 econometrica51 1799 1819 while there are some special cases in which the incentive compatible core is non empty our main result shows that is not generally true journal of economic literatureclassification numbers c71 c72 d51

adverse selection and competitive market making empirical evidence from a limit order market this article presents a new methodology for testing economic restrictions on the price schedules offered in a limit order book that are based on i break even conditions for marginal limit orders and ii rational updating conditions for order book revisions over time using order flow data from the stockholm stock exchange i find strong evidence of insufficient depth in the limit order books relative to the theoretical predictions an extended model which allows the model parameters to depend on market conditions captures some of the systematic variation in the observed order book depth article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

competition among trading venues information and trading on electronic communications networks this paper explores the competition between two trading venues electronic communication networks ecns and nasdaq market makers ecns oier the advantages of anonymity and speed of execution which attract informed traders thus trades are more likely to occur on ecns when information asymmetry is greater and when trading volume and stock return volatility are high ecn trades have greater permanent price impacts and more private information is revealed through ecn trades than though market maker trades however ecn trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and oier them better executions technological innovations that enable high speed low cost electronic trading systems are dramatically changing the structure of nancial markets exchanges and markets around the world are merging or forming alliances to improve liquidity and reduce costs in the face of increased competition from each other and from these computerized trading systems trading volume on electronic communications networks ecns has grown rapidly over the past several years ecns are now involved in more than a third of nasdaq trading volume and are attempting to increase their market share in nyse listed

risk aversion and the winner s curse this article analyzes an auction in which bidders see independent components of a common prize value the nash equilibrium for two rational bidders is shown to be independent of risk attitudes the information structure allows explicit calculation of an alternative equilibrium in which naive bidders do not correctly discount the value of the prize contingent on winning and thus they suffer the winner s curse subjects in a laboratory experiment clearly fall prey to the winner s curse the data conform most closely to the predictions of the naive model moreover the level of risk aversion implied by fitting the naive model is similar to an independent risk aversion measure obtained in a separate private value bidding exercise

auctions with a random number of identical bidders abstract we examine and compare the normally mixed symmetric equilibrium bidding strategies in first price and all pay common value multiple item auctions with a random number of bidders who only seek one of the identical items and have the same budget

a note on the incentive compatible core abstract we identify particular exchange economies with asymmetric information in which the ex ante incentive compatible core is nonempty provided that coalitions can allocate goods by means of random mechanisms both the use of random mechanisms and the restriction to a specific class of economies are crucial for the result indeed the ex ante incentive compatible core can be empty i in our class of economies if coalitions can only use deterministic mechanisms and ii outside this class even if random mechanisms are allowed journal of economic literature classification numbers c71 d82 d51

trading fees and efficiency in limit order markets competition among trading platforms has considerably reduced trading fees in stock markets we show that this evolution is not necessarily beneficial to investors although they increase gains from trade when a trade happens lower trading costs can induce investors to post limit orders with a smaller execution probability in this case gains from trade are realized less frequently and investors can be worse off our model has testable implications for the effects of trading fees and their breakdown between liquidity suppliers and liquidity demanders on limit order fill rates and bid ask spreads

trade execution costs and market quality after decimalization this study assesses trade execution costs and market quality for nyse and nasdaq stocks before and after the 2001 change to decimal pricing several theoretical predictions are confirmed quoted bid ask spreads declined substantially on each market with the largest declines for heavily traded stocks the percentage of shares receiving price improvement increased on the nyse but not on nasdaq however those trades completed at prices within or outside the quotes were improved or disimproved by smaller amounts after decimalization and trades completed outside the quotes saw the largest reductions in trade execution costs as a class effective bid ask spreads as a percentage of share price arguably the most relevant measure of execution costs for smaller trades averaged 0 33 on a volume weighted basis after decimalization for both nyse and nasdaq stocks there is no evidence of systematic intraday reversals of quote changes on either market as would be expected if decimalization had damaged liquidity supply

walras retrouve decentralized trading mechanisms and the competitive price we extend the standard analysis of decentralized markets to allow for the possibility that traders interact simultaneously with more than one trader on the opposite side of the market in contrast with the literature we reconcile the walrasian equilibrium with the outcome of decentralized strategic trade we show that there exist generic matching technologies that determine local market conditions such that as market frictions vanish the equilibrium price is the one that would result in the static walrasian market our analysis highlights the importance of local market conditions for the determination of equilibrium prices

a model of auction contracts with liquidated damages abstract this paper develops an auction model in which the winning bidder has an opportunity to cancel the transaction and pay damages to the seller in the event of a default on the auction contract the winning bidder pays liquidated damages or loses a posted deposit when renegotiation is possible increasing the deposit has no effect on the seller s payoff unless the seller has some bargaining power and exogenously receives some information about the winning bidder under these conditions the seller s payoff is decreasing in the level of the deposit journal of economic literature classification number d44

who should be responsible for software security a comparative analysis of liability policies in network environments in recent years vendor liability for software security vulnerabilities has been the center of an important debate in the software community and a topic gaining government attention in legislative committees and hearings the importance of this question surrounding vendor security liability is amplified when one considers the increasing emergence of zero day attacks where hackers take advantage of vulnerabilities before the software vendor has a chance to release protective patches in this paper we compare the effectiveness of three software liability policies vendor liability for damages vendor liability for patching costs and government imposed security standards we find that vendor liability for losses is not effective in improving social welfare in the short run while liability for patching costs can be effective if either patching costs are large and the likelihood of a zero day attack is low or patching costs are small and zero day likelihood is high in the long run when the vendor can invest in reducing the likelihood of security vulnerabilities loss liability is still ineffective when the zero day attack probability is high but can increase both vendor investment in security and social welfare when zero day attack likelihood is sufficiently low when the zero day attack probability is high patch liability is ineffective if user patching costs are large but partial patch liability can boost vendor investment and improve welfare when patching costs are small in contrast in an environment with low zero day attack probability full vendor patch liability can be optimal finally comparing the effectiveness of the three liability policies under study we find that government imposed standards on software security investment can be preferable to both patching and loss liability on the vendor if zero day attack likelihood is sufficiently low however if zero day attacks are a common occurrence and patching costs are not too high partial patch liability is the most effective policy this paper was accepted by sandra slaughter information systems

incentives and the existence of pareto optimal revelation mechanisms abstract from the characterization of strongly and bayesian incentive compatible paretooptimal mechanisms with transferable utilities we derive the following results if there are only two types per individual then a strongly incentive compatible paretooptimal mechanism exists if there are only two individuals with more than three types then there are sets of beliefs open in the class of all beliefs for which no bayesian incentive compatible pareto optimal mechanism exists if there are more than two individuals then the class of beliefs for which such mechanisms exist is open and dense in the class of all beliefs

island goes dark transparency fragmentation and regulation responding to a september 2002 regulatory enforcement the island electronic communications network stopped displaying its limit order book in the three most active exchange traded funds etfs where it was the dominant venue island s share of trading activity and price discovery fell fragmenting the market etf prices adjust more slowly when island goes dark and there is substantial price discovery movement from etfs to the futures market trading costs increase on island and decrease off island with higher trading costs overall when island later redisplays its orders market quality improves with transparency and the reduction in fragmentation both playing important roles copyright 2005 oxford university press

subgame perfect cooperation in an extensive game abstract we propose a new solution concept for games in extensive form that incorporates both cooperation and subgame perfection from its definition and properties the new solution concept named the subgame perfect core is a refinement of the core of an extensive game in the same sense as the set of subgame perfect nash equilibria is a refinement of the set of nash equilibria to further characterize the subgame perfect core we show that each subgame perfect core payoff vector can be implemented as a non cooperative solution as it is a subgame perfect nash equilibrium payoff vector of an extensive form game that is closely related to the original game we also motivate and introduce a related concept of subgame perfect strong nash equilibrium of an extensive game that is coalition proof

not knowing the competition evidence and implications for auction design in a government auction program where first price auctions generate significantly higher revenue than english auctions i document evidence that bidders are uncertain about the number of auction entrants motivated by additional data evidence i estimate a structural model of auctions in which rivals participation is stochastic allowing for bidders risk aversion and asymmetry counterfactual simulations reveal that bidders uncertainty about the number of entrants combined with risk aversion substantially softens the revenue impact of low competition in first price auctions this explains the observed revenue patterns and uncovers an empirically important reason for sellers to favor first price auctions over english auctions

market maker quotation behavior and pretrade transparency we examine the impact of differing levels of pretrade transparency on the quotation behavior of nasdaq market makers we find that market makers are more likely to quote on odd ticks and to actively narrow the spread when they can do so anonymously by posting limit orders on electronic communication networks ecns from a public policy perspective our findings suggest that making the level of pretrade transparency on nasdaq more opaque by allowing anonymous quotes could improve price competition and narrow spreads further

cooperation in strategic games revisited for two person complete information strategic games with transferable utility all major variable threat bargaining and arbitration solutions coincide this confluence of solutions by luminaries such as nash harsanyi raiffa and selten is more than mere coincidence staying in the class of two person games with transferable unility the article presents a more complete theory that expands their solution specifically it presents 1 a decomposition of a game into cooperative and competitive components 2 an intuitive and computable closed form formula for the solution 3 an axiomatic justification of the solution and 4 a generalization of the solution to games with private signals along with an arbitration scheme that implements it the objective is to restart research on cooperative solutions to strategic games and their applications jel codes c71 c72 c78 copyright 2013 oxford university press

contests with an unknown number of contestants this paper studies rent seeking contests where the contestants do not know the number of actively competing contestants two models are compared in the first all players are risk neutral in the second all have constant absolute risk aversion if the expected fraction of active contestants is low an increase in the number of potential contestants increases individual rent seeking efforts this effect is in contrast to the complete information case where individual rent seeking efforts decrease in the number of contestants the effect is more likely under risk neutrality but also possible under risk aversion equilibrium rent seeking efforts are lower under risk aversion if and only if the expected fraction of active contestants is low

informational size incentive compatibility and the core of a game with incomplete information we study the ex ante incentive compatible core and provide conditions under which the ex ante incentive compatible core is nonempty when agents are informationally small in the sense of mclean and postlewaite 2002a econometrica 70 2421 2453

does pooling purchases lead to higher profits consider two buyers facing uncertain demands who need to purchase a common critical component from a powerful sole source supplier if the two buyers pool their demands and purchase from the supplier as a single entity will they necessarily earn higher profits than purchasing separately we show that when a powerful supplier extracts profits from the buyers through optimal contract design the demand variability reduction achieved by pooling can harm the buyers because it makes extracting profits easier for the supplier we characterize cases when pooling is disadvantageous and also provide insights into when it is still advantageous our result is in contrast to the case where the price of the component is exogenous typically assumed in most of the pooling literature in which case pooling demands is always beneficial for the buyers

equilibrium discovery and preopening mechanisms in an experimental market we experimentally analyze how to design preopening mechanisms facilitating coordination on high equilibrium liquidity and gains from trade we allow a call auction to be preceded by a preopening or not preopening orders to be binding or not and the opening time to be deterministic or random when the preopening is nonbinding traders place manipulative orders reducing the credibility of preplay communication random market opening deters manipulation but also hinders communication by making it costly gains from trade are maximized when preopening orders are binding this enables some traders to place early limit orders attracting further liquidity data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1787 this paper was accepted by wei xiong finance

when does it pay to delay supplier qualification theory and experiments we study a procurement setting in which the buyer seeks a low price but will not allocate the contract to a supplier who has not passed qualification screening qualification screening is costly for the buyer involving product tests site visits and interviews in addition to a qualified incumbent supplier the buyer has an entrant of unknown qualification the buyer wishes to run a price only open descending reverse auction between the incumbent and the entrant and faces a strategic choice about whether to perform qualification screening on the entrant before or after the auction we analytically study the buyer s optimal strategy accounting for the fact that under postauction qualification the incumbent knows he could lose the auction but still win the contract in our analysis we derive the incumbent s optimal bidding strategy under postauction qualification and find that he follows a threshold structure in which high cost incumbents hold back on bidding or even boycott the auction to preserve their profit margin and only lower cost incumbents bid to win these results are strikingly different from the usual open descending auction analysis where all bidders are fully qualified and bidding to win is always a dominant strategy we test our analytical results in the laboratory with human subjects we find that qualitatively our theoretical predictions hold up quite well although incumbent suppliers bid somewhat more aggressively than the theory predicts making buyers more inclined to use postauction qualification this paper was accepted by martin lariviere operations management

core convergence with asymmetric information we analyze the ex ante incentive compatible core for replicated private information economies we show that any allocation in the core when the economy is replicated sufficiently often is approximately walrasian for the associated arrow debreu economy

rfq auctions with supplier qualification screening we consider a manufacturer using a request for quotes rfq reverse auction in combination with supplier qualification screening to determine which qualified supplier will be awarded a contract supplier qualification screening is costly for the manufacturer for example involving reference checks financial audits and on site visits the manufacturer seeks to minimize its total procurement costs i e the contract payment plus qualification costs although suppliers can be qualified prior to the auction prequalification we allow the manufacturer to delay all or part of the qualification until after the auction postqualification using an optimal mechanism analysis we analytically explore the trade offs between varying levels of pre and postqualification although using postqualification causes the expected contract payment to increase bids from unqualified suppliers are discarded we find that standard industrial practices of prequalification can be improved upon by judicious use of postqualification particularly when supplier qualification screening is moderately expensive relative to the value of the contract to the manufacturer

informational size and incentive compatibility we examine a general equilibrium model with asymmetrically informed agents the presence of asymmetric information generally presents a conflict between incentive com patibility and pareto efficiency we present a notion of informational size and show that the conflict between incentive compatibility and efficiency can be made arbitrarily small if agents are of sufficiently small informational size the incompatibility of pareto efficiency and incentive compatibility is a central theme in economics and game theory the issues associated with this incompatibility are particularly important in the design of resource allocation mechanisms in the presence of asymmetrically informed agents where the need to acquire information from agents in order to compute efficient outcomes and the incentives agents have to misrepresent that information for personal gain come into conflict despite a large literature that focuses on these issues there has been little work aimed at understanding those situations in which informational asymmetries are quantitatively important virtually every transaction is characterized by some asymmetry of information any investor who buys or sells a share of stock generally knows something rel evant to the value of the share that is not known to the person on the other side of the transaction in order to focus on more salient aspects of the problem many models rightly ignore the incentive problems associated with informa tional asymmetries in the belief that for the problem at hand agents are infor mationally small however few researchers have investigated the circumstances under which an analysis that ignores these incentive problems will yield results similar to those obtained when these problems are fully accounted for in this paper we study a class of mechanism design problems our goal is to formalize informational size in a way that when agents are informationally small 1 early versions of this paper circulated under the titles informational smallness and pareto effi ciency and informational smallness and incentive compatibility we thank jacques cremer dean foster andreu mas colell stephen morris david schmeidler and particularly faruk gul for help ful conversations and rajiv vohra for a very careful reading we also thank the numerous partici pants in seminars at which this paper was presented for helpful comments we also thank an editor and the referees for very helpful comments and thank ichiro obara for pointing out an error in an earlier version postlewaite gratefully acknowledges support from the national science foundation

virtual utility and the core for games with incomplete information abstract the core is extended to games with incomplete information the feasible set is characterized by incentive compatible mechanisms blocking is organized at the interim stage by an incentive compatible mediation plan membership of the blocking coalition itself may be determined randomly by the blocking mediator nonemptiness of an interim fine core is proven for games with a balanced structure independent types and sidepayments an offer of severance payments may be needed to inhibit blocking core allocations are characterized in terms of virtual utility scales that generalize the weighted utility scales of the inner core mechanisms that achieve core allocations are coalitionally durable

high bids and broke winners abstract this paper analyzes auctions where budget constrained bidders have options to declare bankruptcy it predicts a bidding equilibrium that changes discontinuously in a borrowing rate available to bidders when the borrowing rate is above a threshold high budget bidders win and the likelihood of bankruptcy is low when the borrowing rate is below the threshold the winner is the most budget constrained bidder and is most likely to declare bankruptcy this result explains the high bids and broke winners anomaly in the c block fcc spectrum auction based on its equilibrium analysis the paper proves that a seller can profit from offering to finance the highest bidder at a below market interest rate even with default risk journal of economic literature classification numbers d44 d45 d82 g33 l96

revenue deficiency under second price auctions in a supply chain setting consider a firm called the buyer that satisfies its demand over two periods by assigning both demands to a supplier via a second price procurement auction call this the standard auction in the hope of lowering its purchase cost the firm is considering an alternative procedure in which it will also allow bids on each period individually where there can be either one or two winners covering the two demands call this the multiple winner auction choosing the multiple winner auction over the standard auction can in fact result in a higher cost to the buyer we provide a bound on how much greater the buyer s cost can be in the multiple winner auction and show that this bound is tight we then sharpen this bound for two scenarios that can arise when the buyer announces his demands close to the beginning of the demand horizon under a monotonicity condition we achieve a further sharpening of the bound in one of the scenarios finally this monotonicity condition allows us to generalize this bound to the t period case in which bids are allowed on any subset of period demands

a smart market for industrial procurement with capacity constraints we address the problem of designing multi item procurement auctions for a monopsonistic buyer in capacity constrained environments using insights from classical auction theory we construct an optimization based auction mechanism smart market relying on the dynamic resolution of a linear program minimizing the buyer s cost under the suppliers capacity constraints suppliers can modify their offers in response to the optimal allocation corresponding to each set of bids giving rise to a dynamic competitive bidding process to assist suppliers we also develop a bidding suggestion device based on a myopic best response mbr calculation that solves an associated optimization problem assuming linear costs for the suppliers we study within a game theoretic framework the sequence of bids arising in this smart market under a weak behavioral assumption and some symmetry requirements an explicit upper bound for the winning bids is established we then formulate a complete behavioral model and solution methodology based on the mbr rationale and show that the bounds derived earlier continue to hold we analytically derive some structural and convergence properties of the mbr dynamics in the simplest nontrivial market environment which suggests further possible design improvements and investigate bidding dynamics and incentive compatibility issues via numerical simulations