Toolbox for Economic Design

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This book combines economic theory and design to create tools that economists can use to apply in social, political and institutional application. This book seeks to provide the necessary stepping stones in order to facilitate the diffusion and adoption of this powerful tool for studying incentive structures in economics. The book presents a number of examples, both theoretical and real-life. It also has a chapter that samples the literature that tests mechanisms away from the blackboard, in laboratories and the real world.

This book provides readers (students and applied economists) with the tools to design the rules of economics to harness the power of incentives.

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Editorial Reviews

From the Publisher

"This is an outstanding book on mechanism design. The fundamentals are superbly presented. And there is considerable advanced material from the last few years of research — also extremely well presented. An instructor could take a second year undergraduate class through the book by using only the introductory passages and the attendant examples, which are excellent. A more advanced undergraduate class can work through the theorems and proofs. Nor is this book out of place at the graduate level." -- Don Campbell, CSX Professor of Economics and Public Policy, The College of William and Mary

"Until now there has not been a good textbook to acquaint students with the field of economic mechanism design. This textbook fills this gap very competently. This book brings together a well-developed introduction to the field, including recent developments in the various branches of this field, as well as applications of the main mechanism design tools to understand many real-life problems. In particular, this text provides tools to understand the proper design of economic policy, which is very welcome in view of the problematic economic policy design for our contemporary complex global economy. A Toolbox for Economic Design provides exactly the right balanced set of material to cover the increasingly important field of economic mechanism design in any bachelor, master or even Ph.D. program in economics." -- Robert P. Gilles,Professor of Economics, Virginia Tech

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Product Details

  • ISBN-13: 9780230610606
  • Publisher: Palgrave Macmillan
  • Publication date: 3/15/2009
  • Edition description: New Edition
  • Pages: 304
  • Product dimensions: 7.70 (w) x 9.30 (h) x 2.70 (d)

Meet the Author

Dimitrios Diamantaras joined the economics department at Temple in 1988, upon completing his Ph.D. studies at the University of Rochester. He has taught many different courses at Temple at all levels, including courses in microecomic and macroeconomic principles, intermediate and graduate microeconomics, game theory, economics of fairness, mathematical economics, the economics of risk and uncertainty, a course he created in 1999, and the economics of arts and culture, a course he created in 2003. His research focuses on public economics, general equilibrium and game theory. His publications have appeared in Economics Letters, Social Choice and Welfare, International Economic Review, Journal of Mathematical Economics, Journal of Economic Theory, Economic Theory, Journal of Public Economics, Review of Economic Design, Division of Labour and Transaction Costs, and Journal of Economic Behavior and Organization. He was named Fuller Research Fellow for 1998-2000 by the Fox School of Business and Management.

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Table of Contents


1 Introduction 1

1.1 A Story from Ancient Athens

1.2 Institutions and Economics

1.3 The Big Picture

1.4 Auction Example

1.5 A Taste of Social Choice Theory

1.5.1 Arrow’s Impossibility Theorem

1.6 Social Choice Functions

1.7 Economic Domain

1.7.1 Exchange Economies

1.7.2 Social Choice Correspondences on the Exchange Economy Domain

1.7.3 The Pareto Social Choice Correspondence

1.7.4 The Individually Rational Social Choice Correspondence

1.7.5 The Core Social Choice Correspondence

1.7.6 The No-Envy Social Choice Correspondence

1.7.7 Combinations of the previous Social Choice Correspondences

1.7.8 The Walrasian Social Choice Correspondence

1.8 Quasilinear Preferences and Their Uses

1.9 Appendix: Proofs

1.9.1 Arrow’s Impossibility Theorem

1.9.2 Gibbard-Satterthwaite Theorem

1.10 Exercises

2 Dominant Strategy Implementation

2.1 Definitions

2.2 Revelation Principle

2.3 Restricting Domains: Single-Peaked Preferences

2.4 Restricted Domains: Quasilinear Domains and Groves Mechanisms

2.4.1 Balance Problem

2.4.2 Voluntary Participation Problem

2.5 The Vickrey Auction

2.6 Exercises

3 Implementation in Nash Equilibria: A Lot of Information Assumed

3.1 A Quick Lesson on Nash Equilibrium

3.1.1 Nash equilibrium in mixed strategies

3.2 Nash Equilibrium in Implementation

3.2.1 Strategy Space Reduction

3.3 Two Person Cases

3.4 Exercises 4 Bayesian Equilibrium and Mechanisms

4.1 Preliminary: How to Represent Information

4.2 Bayesian Equilibrium

4.3 The Bayesian Revelation Principle

4.4 The mechanism of d’Aspremont and Gérard-Varet and of Arrow

4.4.1 Voluntary Participation

4.5 Optimal Auctions

4.6 Bilateral Trading

4.7 Exercises

5 Refined Nash Implementation

5.1 Implementation in Subgame Perfect Equilibrium

5.1.1 Subgame Perfect Implementation in Quasilinear Environments

5.2 Implementation using Undominated Strategies

5.3 Double Implementation

5.3.1 Definitions

5.3.2 Ratio Correspondence

5.4 Virtual Nash Implementation

6 Applications

6.1 Manipulation-Resistant Online Reputation Systems

6.2 Walrasian Implementation via Market Games

6.3 Implementing the Lindahl Social Choice Correspondence

6.4 Implementing Fair Allocations

6.5 Application to Negative Externality Problems: Pollution Abatement

6.6 A Nearly Efficient Mutual Insurance Mechanism

6.7 Financing the Athenian Fleet

7 Bayesian Implementation

7.1 Example of Multiple Bayesian Equilibria

7.2 Bayesian Implementation and Bayesian Monotonicity

7.2.1 Resrictiveness of Bayesian Monotonicity

7.3 Virtual Bayesian Implementation

8 Further Topics in Mechanism Design

8.1 Endogenous Mechanisms

8.1.1 Notation and Definitions

8.1.2 An Application: Public Goods

8.1.3 Positive Results for Endogenous Games with 3 or More Players

8.2 Overcoming Incentive Constraints by Linking Decisions

8.2.1 Notation and Definitions

8.2.2 Results

8.3 Robust Mechanism Design

8.3.1 Notation and Definitions

8.3.2 Results

8.4 The Limits of Ex Post Implementation

8.4.1 Notation and a Result

8.4.2 An Illustration of the Geometric Condition

8.5 Exercises

9 Matching Models: Theory and Applications 203

9.1 What is Matching?

9.1.1 Definitions and Notation

9.2 Two-Sided Matching

9.2.1 One-to-One Matching

9.2.2 Many-to-One Matching

9.3 One-Sided Matching

9.3.1 The Shapley and Scarf house market

9.3.2 House Allocation Problems

9.3.3 The Kidney Exchange Problem

9.4 Exercises

10 Empirical Evidence on Mechanisms

10.1 Introduction

10.2 Voluntary Contribution Mechanisms for Public Goods

10.3 Tests of Incentive Compatibility

10.4 Research on Mechanism Dynamics

10.5 Tests of Implementation Concepts

10.6 Applied Economic Design: Notes from the Field

10.7 Conclusion

A Mathematics Review and More on Economic Domains

A.1 Sets, Correspondences, Functions, Intervals

A.2 Derivatives and Related Notation

A.3 Elements of mathematical optimization

A.4 Envelope Theorem

A.5 The Edgeworth Box

A.6 Public Good Economies

A.6.1 The Simplest Public Project Model

A.6.2 Public Goods Models

A.6.3 Social Choice Correspondences on Public Good Economy Domains

A.6.4 Pareto Social Choice Correspondence

A.6.5 Lindahl and Constrained Lindahl Social Choice Correspondences

A.6.6 Ratio Social Choice Correspondence

A.7 Exercises Notation Bibliography


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