Laura Razzolini

Explaining Overbidding in First Price Auctions Using Controlled Lotteries

In this paper, we study the behavior of individuals when facing two different, but incentive-wise identical, institutions. We pair the first price auction with an equivalent lottery. Once a subject is assigned a value for the auctioned object, the first price auction can be modeled as a lottery in which the individual faces a given probability of winning a certain payoff. This set up allows us to explore to what extent the misperception of the probability of winning in the auction is responsible for bidders in a first price auction to bidding above the risk neutral Nash equilibrium prediction. The first result we obtain is that individuals, even though facing the same choice over probability/payoff pairs, behave differently depending on the type of choice they are called to make. When facing an auction, subjects with high values tend to bid significantly above the bid they choose in the corresponding lottery environment. We further find that in both the lottery and the auction environments, subjects tend to bid in excess of the bid predicted by the risk neutral model, at least for intermediate range values. Finally, we find that the difference between the lottery behavior and the auction behavior is substantially, but not totally, eliminated by showing the subjects the probability of winning the auction.

Voluntary cost sharing for an excludable public project

Abstract The Clarke-Groves family of mechanisms provides a solution to the free-rider problem, that originates when providing a pure public good. These mechanisms, however, have two drawbacks: they are not voluntary, and they generate budget surpluses which cause welfare losses. In this paper we analyze the case of an indivisible excludable public project: the possibility of exclusion offers an additional instrument for avoiding these problems. We characterize cost sharing rules which satisfy the properties of strategyproofness and voluntariness. We show that these rules must charge the same price to all the individuals being provided with the good. A member of this class of voluntary cost sharing rules is the serial cost sharing rule (Moulin, H., 1994. Serial cost sharing of excludable public goods. Review of Economic Studies 61, 305–325), of which we provide alternative characterizations.

Raising Revenues for Charity: Auctions Versus Lotteries

We report an experiment conducted to gain insight into factors that may affect revenues in English auctions and lotteries, two commonly used charity fund-raising formats. In particular, we examine how changes in the marginal per capita return (MPCR) from the public component of bidding, and how changes in the distribution of values affect the revenue properties of each format. Although we observe some predicted comparative static effects, the dominant result is that lottery revenues uniformly exceed English auction revenues. The similarity of lottery and English auction bids across sales formats appears to drive the excess lottery revenues.

On the (relative) unimportance of a balanced budget

This paper explores the reasoning underlying Milton Friedmans preference for a small, unbalanced budget over a large, balanced one. Because the marginal return from government spending is less than the marginal cost (measured in terms of the amount of income private individuals remain free to spend), government expenditures have more of an adverse impact on the economy in his view than does the method of financing that spending. Using a panel data set comprising the 50 states plus the District of Columbia, we report evidence from the years 1967 through 1992 that growth rates in income per capita tend to be higher in states with smaller public sectors. Moreover, we find that while both deficits and taxes reduce the rate of income growth in a state, the negative impact of government spending is considerably larger at the margin.

The Paradox of Misaligned Profiling

This article implements an experimental test of a game-theoretic model of equilibrium profiling. Attackers choose a demographic “type” from which to recruit, and defenders choose which demographic types to search. Some types are more reliable than others in the sense of having a higher probability of carrying out a successful attack if they get past the security checkpoint. In a Nash equilibrium, defenders tend to profile by searching the more reliable attacker types more frequently, whereas the attackers tend to send less reliable types. Data from laboratory experiments with financially motivated human subjects are consistent with the qualitative patterns predicted by theory. However, we also find several interesting behavioral deviations from the theory.

Traffic congestion mitigation: combining engineering and economic perspectives

This paper introduces and provides a context for a special issue consisting of five selected papers that examine traffic congestion mitigation, with a focus on combining engineering and economic perspectives. Each paper provides novel insights of their own. The papers cover the modeling of parking behavior using possibility theory as well as the evaluation of a novel concept called Highway Space Inventory Control, where drivers must book in advance for their highway usage. A further paper evaluates the implications of new types of traffic pricing schemes and the challenges they face. Another paper tackles exactly this problem by evaluating different measures using data from the Netherlands. A fourth paper examines the implications of a disaster (bridge collapse) on traffic and assigns an economic value to such an outcome. The final paper is a case study that shows that price-based mechanisms may not be the best way to curb congestion.

The evolution of revolution: Is splintering inevitable?

We use an evolutionary model to study splintering within rebel groups. We assume that rebels possess cultural traits that encourage cooperation, defection (splintering), or a trigger behavior like Tit-For-Tat. We characterize the dynamic process by which rebels’ discount rates determine whether splintering will occur in the rebel population even when cooperation is otherwise efficient. The results suggest that political action by governments that make rebels impatient also increases the likelihood of rebel group splintering. This may be counterproductive from a government’s point of view. Our article closes a gap in the literature by providing a theoretical model for how rebel groups form. Policies that affect the patience of rebels and change the cultural context within rebel groups influence the likelihood of rebel group splintering. This article’s contribution to the literature is twofold. First, it applies an established modeling approach to understand how even otherwise cohesive rebellions can splinter as a consequence of exogenous shocks that change rebels’ time horizons. Second, we highlight how cultural context can influence this splintering process.

Strategy-proof cost sharing, ability to pay and free provision of an indivisible public good

Abstract We distinguish between absolute ability ( AATP ) to pay, which represents an absolute constraint on the amount that an individual can be charged, and relative ability to pay ( RATP ) as expressed by differential social welfare weights. We examine the implications of these two principles on free provision of public goods in the context of strategy-proof cost sharing mechanisms. We find that while the AATP considerations can lead to rich individuals being charged high prices, the high prices would be associated with the public good being provided free to fewer individuals. RATP considerations can lead to free provision of the public good to a significant fraction of the society but would imply an upper bound on the price that can be charged to any rich individual.

Introduction: Public Choice at the Millennium

Thirty-five years ago, Dennis Mueller was able to survey the field of public choice within the space of an article-length contribution to the Journal of Economic Literature. Fifteen years later, Public Choice II, the second edition of the book expanding on that initial literature review, ran to nearly 500 pages of densely packed text and cited approximately 900 scholarly works. At the dawn of the twenty-first century, attempting to do the field justice within the covers of a single volume has become a daunting challenge.1 That is because the ideas and methods elaborated by Duncan Black, Anthony Downs, Kenneth Arrow, James Buchanan, Gordon Tullock, William Riker and Mancur Olson have permeated virtually every recognized area of specialization within the disciplines of economics, political science and, to a lesser extent, sociology. Not unlike the successful inroads made by neoclassical economics itself into research on the family, crime and punishment, and the law, public choice has transformed the study of Homo politicus. If the theories of social science are to be judged by their applications, by their ability to help explain observed human behavior within a particular set of institutional constraints (and even to help illuminate the design of the institutions that impose those constraints), then public choice has perhaps been the most successful theoretical innovation to have appeared in the past halfcentury or so. By Kuhnian (Kuhn 1970) standards, public choice truly has been revolutionary. The established paradigm challenged by public choice is customarily referred to as the public-interest theory of democratic government. That theory presumes unselfish benevolence on the part of the government actors to whom ordinary citizens delegate decision-making authority. Be they elected representatives or full-time government employees, these actors are portrayed in the older way of thinking as public ‘servants’ motivated only by a desire to maximize society’s welfare. Moreover, the public-interest model presumes that the social preferences to which government actors faithfully respond can be ascertained readily through the workings of the democratic process. Once the ‘will of the people’ is thus determined, the public sector’s decision makers can move quickly to supply public goods in desired quantities, to intervene remedially in the economy when markets fail to produce Pareto-efficient allocations of goods or of productive resources, and to redistribute incomes more fairly.

Cyberdefense When Attackers Mimic Legitimate Users: A Bayesian Approach

Cyber defenders cannot clearly identify attackers from other legitimate users on a computer network. The network administration can protect the network using an active or a passive defense. Attackers can mount attacks like denial of service attacks or try to gain entry into secure systems. We model cyber defense as a signaling game. We find Bayesian Nash equilibria for both the attacker and the defender and characterize how these equilibria respond to changes in underlying parameters. We explore the question, is there an optimal deterrence policy that utilizes passive and/or active defenses given that both attacks and defenses impose costs on legitimate users? Comparative static results show how exogenous changes in the context and the nature of the attack change optimal strategies for both the attacker and the defender. These results suggest that sensors should look for certain kinds of information and not others as well as technologies that can automatically calibrate a response. Results also suggest when attackers are more likely to break into secure systems relative to mounting DDoS attacks. We use simulation to verify the analytical results.