Daniel R. Vincent

Optimal Procurement Mechanisms

The procurement of supplies is often conducted through the buyer analogue of an auction. Sealed bids are submitted and the contract is awarded to the lowest bidder. Although this method may be an optimal way of selling an object, an additional complication arises in the case of purchasing a good. When sellers are privately informed about the quality of the good to be sold, these mechanisms typically result in the provision of the lowest quality object. This paper characterizes optimal mechanisms in environments where sellers are privately informed about quality. It shows that the commonly used auction mechanism is privately or socially optimal in only a small class of environments. In another plausible set of environments the optimal mechanism is simply to order potential supplies and to tender take-it-or-leave-it offers to each sequentially. We use the duality theorem of linear programming to provide a methodology by which necessary and sufficient conditions can be derived to determine when any incentive compatible trading environment maximizes social or private surplus.

Multidimensional Mechanism Design: Revenue Maximization and the Multiple-Good Monopoly

The seller of N distinct objects is uncertain about the buyer’s valuation for those objects. The seller’s problem, to maximize expected revenue, consists of maximizing a linear functional over a convex set of mechanisms. A solution to the seller’s problem can always be found in an extreme point of the feasible set. We identify the relevant extreme points and faces of the feasible set. With N = 1, the extreme points are easily described providing simple proofs of well-known results. The revenue-maximizing mechanism assigns the object with probability one or zero depending on the buyer’s report. With N > 1, extreme points often involve randomization in the assignment of goods. Virtually any extreme point of the feasible set maximizes revenue for a well-behaved distribution of buyer’s valuations. We provide a simple algebraic procedure to determine whether a mechanism is an extreme point.

Bundling as an optimal selling mechanism for a multiple-good monopolist

Abstract Multiple objects may be sold by posting a schedule consisting of one price for each possible bundle and permitting the buyer to select the price–bundle pair of his choice. We identify conditions that must be satisfied by any price schedule that maximizes revenue within the class of all such schedules. We then provide conditions under which a price schedule maximizes expected revenue within the class of all incentive compatible and individually rational mechanisms in the n -object case. We use these results to characterize environments, mainly distributions of valuations, where bundling is the optimal mechanism in the two and three good cases.

How to Set Minimum Acceptable Bids, with an Application to Real Estate Auctions

In a general auction model with affiliated signals, common components to valuations and endogenous entry, we compute the equilibrium bidding strategies and outcomes, and derive a lower bound on the optimal reserve price. This lower bound can be computed using data on past auctions combined with information about the subsequent sales prices of unsold goods. We illustrate how to compute the lower bound using data from real estate auctions.

Bayesian and Dominant-Strategy Implementation in the Independent Private-Values Model

We prove—in the standard independent private-values model—that the outcome, in terms of interim expected probabilities of trade and interim expected transfers, of any Bayesian mechanism can also be obtained with a dominant-strategy mechanism.

Repeated Signalling Games and Dynamic Trading Relationships

A seller of a nondurable good repeatedly faces a buyer who is privately informed about the position of his demand curve. The seller offers a price in each period. The buyer chooses a quantity given the price. The quantity demanded reveals information about the buyer. An equilibrium is characterized with the feature that buyer types separate completely in the first period. This equilibrium uniquely satisfies a modified refinement of the Cho-Kreps criterion. Despite the immediate separation, the buyer distorts his behavior throughout the game. The requirement to signal types can raise the utility of all types of informed players. Copyright 1998 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Modelling competitive behavior

A single seller of an indivisible object wishes to sell the good to one of many buyers. The seller has zero value for the good; the buyers have a commonly known identical value of one. This paper attempts to determine strategic environments, which ensure the sellers ability to exploit the competitive behavior of the buyers to extract all the surplus in the game. It is shown that in many simple dynamic games, there are subgame perfect equilibria, which involve the seller giving up the good for free. Even if the seller has an informational advantage which allows him to keep bidders from learning the bidding behavior of their opponents, there still exist (perfect Bayesian) equilibria which involve a sale at the price of zero. However, in this case, a simple refinement in the spirit of sequential equilbria can be used to rule out such collusive behavior in the spirit of sequential equilibria can be used to rule out such collusive behavior and to show that the unique equlibrium outcome satisfying this refinement involve a price of one.

Delayed agreements and nonexpected utility

The unexplained occurrence of inefficient delays in reaching agreement is known in the economics literature as the “Hicks paradox.” This paper describes a strategic situation in which players may play a simultaneous move game either before or after a move of Nature. The structure is such that if the players were expected utility maximizers, they would be indifferent over the order of play. However, if at least one of the players is a nonexpected utility maximizer, for example, if player one has preferences over lotteries which exhibit betweenness and fanning out, such a player may strictly prefer to wait before playing the game. If both players exhibit fanning out and betweenness, then there exist games in which both prefer to delay agreement.

Punishment Schedules for Capital Flight

W HAT are appropriate penalties to discourage capital flight? Economic punishments can serve as effective deterrents for economic crimes but the penalties themselves are often costly to impose and enforce. Good public policy must take these costs into account in addition to the effectiveness of punishment schemes. In order to construct a deterrent to economically motivated behaviour, the environment that generates this motivation must be well understood. We show that the incentives for capital flight can differ in predictable ways. This difference in incentives implies that, even though standard risk aversion analyses might suggest the opposite, it will often be better to penalise larger transactions in a higher proportion than smaller ones. A common definition of capital flight is the growth in the stock of one country’s claims on non-residents that generates income beyond the control of the domestic authorities (see, for example, Dooley 1988; Rojas-Suarez, 1990; or Razin and Sadka, 1989). This notion is useful because it distinguishes between portfolio motivations for international capital allocation (which are desirable on grounds of economic efficiency) and movements of capital which are motivated by a desire to evade tax liabilities. The latter type of capital movements imposes costs both in terms of lost government revenues and potential distortions in investment decisions. We focus, therefore, on capital movements which are motivated by the (illegal) desire to shelter investment income from domestic taxation. An understanding of capital flight requires a careful and consistent description of the economic environment that generates the motivations for this phenomenon. For the remainder of this paper, the following assumptions are maintained in order to match as closely as possible conditions that must hold for capital flight to exist:

Daniel R. Vincent on Hugo F. Sonnenschein

“Repeated Signalling Games and Dynamic Trading Relationships” was the first paper I wrote after leaving Princeton and becoming an academic economist. For me, it was a natural successor to the three papers in my thesis, papers which marked me clearly as a student of Hugo Sonnenschein. My thesis treated dynamic trading games where two or three agents attempted to determine a price and time of trade for a single indivisible, durable good. The thesis papers owed a great deal to Hugo’s well-known paper with Robert Wilson and Faruk Gul [2], insofar as they employed a similar model and even used much the same strategy of proof. Indeed, the first paper of my thesis [4] owed its primary significance to the fact that it was able to reverse a famous prediction about durable goods monopoly offered in Gul, Sonnenschein and Wilson [2]. One interpretation of the model in their paper implies that when a bargainer is uncertain solely about the private valuation of her rival, then bargaining will only take a significant time to complete if the technology of making offers requires it. In contrast, I demonstrated that when the uncertainty is over the quality of the good to be traded, often bargaining games had to last a signficant time to ensure trade.