Yeon-Koo Che

Design competition through multidimensional auctions

This article studies design competition in government procurements by developing a model of two-dimensional auctions, where firms 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 buyers utility function and implements the optimal outcome for the buyer under first- and second-score auctions. Absent the commitment power, the only feasible scoring rule is the buyers 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 buyers point of view.

Standard Auctions with Financially Constrained Bidders

We develop a methodology for analyzing the revenue and efficiency performance of auctions when buyers have private information about their willingness to pay and ability to pay. We then apply the framework to scenarios involving standard auction mechanisms. In the simplest case, where bidders face absolute spending limits, first-price auctions yield higher expected revenue and social surplus than second-price auctions. The revenue dominance of first-price auctions over second-price auctions carries over to the case where bidders have access to credit. These rankings are explained by differences in the extent to which financial constraints bind in different auction formats.

The Optimal Mechanism for Selling to a Budget-Constrained Buyer

This paper finds an optimal mechanism for selling an indivisible good to consumers who may be budget-constrained. Unlike the case where buyers are not budget constrained, a single posted price is not typically optimal. An optimal mechanism generally consists of a continuum of lotteries indexed by the probability of comsumption and the entry fee.

Competitive Procurement with Corruption

We study competitive procurement administered by a corrupt agent who is willing to manipulate his evaluation of contract proposals in exchange for bribes. With complete information and no corruption, the efficient firm will win the contract for sure. If the agent is corrupt and has large manipulation power, however, bribery makes it costly for the efficient firm to secure a sure win, so in equilibrium the efficient firm loses the contract with positive probability. The optimal scoring rule for the buyer deemphasizes quality relative to price and does not fully handicap, and may even favor, the efficient firm.

Opinions as incentives

We study costs and benefits of differences of opinion between an adviser and a decision maker. Even when they share the same underlying preferences over decisions, a difference of opinion about payoff‐relevant information leads to strategic information acquisition and transmission. A decision maker faces a fundamental trade‐off: a greater difference of opinion increases an advisers incentives to acquire information but exacerbates the strategic disclosure of any information that is acquired. Nevertheless, when choosing from a rich pool of opinion types, it is optimal for a decision maker to select an adviser with some difference of opinion. Centralization of authority is essential to harness these incentive gains since delegation to the adviser can discourage effort.

Revolving doors and the optimal tolerance for agency collusion

In this article, I study how the presence of a revolving door and potential collusion between a regulator and a regulated firm affect the regulators performance incentives. Contrary to the conventional wisdom, these seemingly undesirable features of the regulatory system may serve the interests of the government because (i) the regulators efforts to enhance her industry qualifications may have a complementary effect on her regulatory performance and (ii) the regulator may become more aggressive in regulation so as to signal her industry qualifications to the firm. Collusion between a regulator and a firm also can be beneficial because a regulator may increase her monitoring effort in order to increase the chance of achieving a profitable side contract with the firm, and side-contracting may not always succeed.

Resolving Conflicting Preferences in School Choice: The "Boston Mechanism" Reconsidered

Despite its widespread use, the Boston mechanism has been criticized for its poor incentive and welfare performances compared to the Gale-Shapley deferred acceptance algorithm (DA). By contrast, when students have the same ordinal preferences and schools have no priorities, we find that the Boston mechanism Pareto dominates the DA in ex ante welfare, that it may not harm but rather benefit participants who may not strategize well, and that, in the presence of school priorities, the Boston mechanism also tends to facilitate greater access than the DA to good schools for those lacking priorities at those schools. (JEL D82, I21, I28)

Expanding 'Choice' in School Choice

Truthful revelation of preferences has emerged as a desideratum in the design of school choice programs. Gale-Shapleys deferred acceptance mechanism is strategy-proof for students but limits their ability to communicate their preference intensities. This results in ex-ante inefficiency when ties at school preferences are broken randomly. We propose a variant of deferred acceptance mechanism which allows students to influence how they are treated in ties. It maintains truthful revelation of ordinal preferences and supports a greater scope of efficiency.

Asymptotic Equivalence of Probabilistic Serial and Random Priority Mechanisms

The random priority (random serial dictatorship) mechanism is a common method for assigning objects to individuals. The mechanism is easy to implement and strategy-proof. However this mechanism is inefficient, as the agents may be made all better off by another mechanism that increases their chances of obtaining more preferred objects. Such an inefficiency is eliminated by the recent mechanism called probabilistic serial, but this mechanism is not strategy-proof. Thus, which mechanism to employ in practical applications has been an open question. This paper shows that these mechanisms become equivalent when the market becomes large. More specifically, given a set of object types, the random assignments in these mechanisms converge to each other as the number of copies of each object type approaches infinity. Thus, the inefficiency of the random priority mechanism becomes small in large markets. Our result gives some rationale for the common use of the random priority mechanism in practical problems such as student placement in public schools.

Rent dissipation when rent seekers are budget constrained

In the original Tullock (1975, 1980) game, an individual bidders probability of winning with a bid b is proportional to bR, where the exponent reflects economies of scale in rent seeking. Different interpretations can be given to these probabilities. First, one may view R as a reflection of the political culture. Alternatively, one may view R as a choice variable for a politician. Intuition suggests that a society with a high tolerance for the selling of political favors and politicians who are receptive to rent seeking would both induce greater rent-seeking expenditures than other societies, all else equal. This paper shows that a lower value of R can actually lead to more rent dissipation than a higher value. This paper also reinforces two points concerning rent seeking. First, the analysis confirms the robustness of under-dissipation of rents, even in the face of entry. Second, it points out the importance of distinguishing between rent-seeking expenditures and rent dissipation. When bidders must borrow, for example, total expenditure may understate rent dissipation.