Haluk Ergin

A theory of subjective compound lotteries

We develop a Savage-type model of choice under uncertainty in which agents identify uncertain prospects with subjective compound lotteries. Our theory permits issue preference; that is, agents may not be indifferent among gambles that yield the same probability distribution if they depend on different issues. Hence, we establish subjective foundations for the Anscombe-Aumann framework and other models with two different types of probabilities. We define second-order risk as risk that resolves in the first stage of the compound lottery and show that uncertainty aversion implies aversion to second-order risk which implies issue preference and behavior consistent with the Ellsberg paradox.

A Unique Costly Contemplation Representation

We study preferences over menus which can be represented as if the individual is uncertain of her tastes, but is able to engage in costly contemplation before selecting an alternative from a menu. Since contemplation is costly, our key axiom, aversion to contingent planning, reflects the individuals preference to learn the menu from which she will be choosing prior to engaging in contemplation about her tastes for the alternatives. Our representation models contemplation strategies as subjective signals over a subjective state space. The subjectivity of the state space and the information structure in our representation makes it difficult to identify them from the preference. To overcome this issue, we show that each signal can be modeled in reduced form as a measure over ex post utility functions without reference to a state space. We show that in this reduced-form representation, the set of measures and their costs are uniquely identified. Finally, we provide a measure of comparative contemplation costs and characterize the special case of our representation where contemplation is costless. Copyright 2010 The Econometric Society.

Consistency in house allocation problems

Abstract In house allocation problems, we look for a systematic way of assigning a set of indivisible objects, e.g., houses, to a group of individuals having preferences over these objects. Typical real life examples are graduate housing, assignment of offices and tasks. Once an allocation is decided upon, the actual assignments of the agents are not likely to take place simultaneously. Therefore, rules whose predictions are independent of the sequence in which the actual assignments are realized turn out to be very appealing. We model this property via the consistency principle and identify various classes of consistent rules and correspondences.

Two-sided matching with indifferences

Abstract Most of the two-sided matching literature maintains the assumption that agents are never indifferent between any two members of the opposite side. In practice, however, ties in preferences arise naturally and are widespread. Market design needs to handle ties carefully, because in the presence of indifferences, stability no longer implies Pareto efficiency, and the deferred acceptance algorithm cannot be applied to produce a Pareto efficient or a worker-optimal stable matching. We allow ties in preference rankings and show that the Pareto dominance relation on stable matchings can be captured by two simple operations which involve rematching of workers and firms via cycles or chains . Likewise, the Pareto relation defined via workers welfare can also be broken down to two similar procedures which preserve stability. Using these structural results we design fast algorithms to compute a Pareto efficient and stable matching, and a worker-optimal stable matching.

Hidden Actions and Preferences for Timing of Resolution of Uncertainty

We study preferences for timing of resolution of objective uncertainty in a menu-choice model with two stages of information arrival. We characterize a general class of utility representations called hidden action representations, which interpret an intrinsic preference for timing of resolution of uncertainty as if an unobservable action is taken between the resolution of the two periods of information arrival. These representations permit a richer class of preferences for timing than was possible in the model of Kreps and Porteus (1978) by incorporating a preference for flexibility. Our model contains several special cases where this hidden action can be given a novel economic interpretation, including a subjective-state-space model of ambiguity aversion and a model of costly contemplation.

Dual-Donor Organ Exchange

Owing to the worldwide shortage of deceased-donor organs for transplantation, living donations have become a significant source of transplant organs. However, not all willing donors can donate to their intended recipients because of medical incompatibilities. These incompatibilities can be overcome by an exchange of donors between patients. For kidneys, such exchanges have become widespread in the last decade with the introduction of optimization and market design techniques to kidney exchange. A small but growing number of liver exchanges have also been conducted. Over the last two decades, a number of transplantation procedures emerged where organs from two living donors are transplanted to a single patient. Prominent examples include dual-graft liver transplantation, lobar lung transplantation, and simultaneous liver-kidney transplantation. Exchange, however, has been neither practiced nor introduced in this context. We introduce dual-donor organ exchange as a novel transplantation modality, and through simulations show that living-donor transplants can be significantly increased through such exchanges. We also provide a simple theoretical model for dual-donor organ exchange and introduce optimal exchange mechanisms under various logistical constraints.

A Microeconomic Analysis of Slavery in Comparison to Free Labor Economies

In addition to supervision costs, the labor cost of an enterprise (plantation) in the system of slavery consists of the cost of acquiring the slaves and the subsistence compensation given out to the slaves. In this paper, we leave aside the issue of supervision costs previously taken up in the theoretical literature on slavery, and focus on these two peculiar components of labor costs. We analyze the implications of this cost structure on the levels of profitability, efficiency and determination of equilibrium wages, and compare them to systems with free labor markets, along a continuum of demand side Cournotic competition. For this purpose, we first use a model characterized by a decreasing returns to scale technology, and show, parallel to the findings of Vedder, et. al. (1990), that the equilibrium subsistence wage in the system of slavery is strictly lower than the marginal product of labor. We then extend the model, given the same technology and preferences, to free labor markets covering possibilities ranging from monopsony to perfect competition in the limit, and obtain a second and perhaps more striking result: Differently from equilibria in imperfectly competitive free labor markets, slavery and perfect competition equilibria are Pareto optimal. Furthermore, our comparisons across labor market scenarios suggest that the resistance of slaveholders to the abolishment of slavery is directly related to the expected level of demand side competition in the free labor market which would replace slavery. Finally, we show that the conclusions derived from our analysis would remain generally valid under a constant returns to scale technology as well.