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A Subsidized Vickrey Auction for Cost Sharing

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Author Info
Jesse A. Schwartz () (Department of Economics, Kennesaw State University)
Quan Wen () (Department of Economics, Vanderbilt University)
Abstract

We introduce a subsidized Vickrey auction for cost sharing problems. Although the average, marginal, and serial cost sharing mechanisms are budget-balanced, they are not allocatively efficient and they do not induce players to truthfully reveal their values as a dominant strategy. The conventional Vickrey auction, on the other hand, is allocatively efficient and does induce truthful bidding as a dominant strategy, but also generates an overpayment. This paper modifies the conventional Vickrey auction so that some of the overpayment is used to subsidize additional production without upsetting the players' incentives to bid truthfully. Although this subsidized Vickrey auction is not allocatively efficient, it always Pareto dominates the conventional Vickrey auction and sometimes dominates other existing cost sharing mechanisms.

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File URL: http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu07-w05.pdf
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File Function: First version, 2007
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0705.

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Date of creation: Apr 2007
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Handle: RePEc:van:wpaper:0705

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Related research
Keywords: Cost sharing; dominant strategy implementation; Vickrey auction; subsidized Vickrey auction;

Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods

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  1. Laura Razzolini & Michael Reksulak & Robert Dorsey, 2004. "An Experimental Evaluation of the Serial Cost Sharing Rule," Working Papers 0402, VCU School of Business, Department of Economics. [Downloadable!]
    Other versions:
  2. Friedman, Eric & Moulin, Herve, 1999. "Three Methods to Share Joint Costs or Surplus," Journal of Economic Theory, Elsevier, vol. 87(2), pages 275-312, August. [Downloadable!] (restricted)
    Other versions:
  3. Moulin, Herve & Shenker, Scott, 1992. "Serial Cost Sharing," Econometrica, Econometric Society, vol. 60(5), pages 1009-37, September. [Downloadable!] (restricted)
  4. Moulin, Herve & Shenker, Scott, 1996. "Strategyproof Sharing of Submodular Access Costs: Budget Balance versus Efficiency," Working Papers 96-31, Duke University, Department of Economics. [Downloadable!]
  5. Moulin Herve & Shenker Scott, 1994. "Average Cost Pricing versus Serial Cost Sharing: An Axiomatic Comparison," Journal of Economic Theory, Elsevier, vol. 64(1), pages 178-201, October. [Downloadable!] (restricted)
  6. McAfee, R. Preston, 1992. "A dominant strategy double auction," Journal of Economic Theory, Elsevier, vol. 56(2), pages 434-450, April. [Downloadable!] (restricted)
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  7. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002. [Downloadable!]
  8. d'Aspremont, Claude & Gerard-Varet, Louis-Andre, 1979. "Incentives and incomplete information," Journal of Public Economics, Elsevier, vol. 11(1), pages 25-45, February. [Downloadable!] (restricted)
  9. Lawrence M. Ausubel, 2004. "An Efficient Ascending-Bid Auction for Multiple Objects," American Economic Review, American Economic Association, vol. 94(5), pages 1452-1475, December. [Downloadable!]
  10. Lawrence M. Ausubel & Paul Milgrom, 2002. "Ascending Auctions with Package Bidding," Working Papers 02004, Stanford University, Department of Economics. [Downloadable!]
  11. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September. [Downloadable!] (restricted)
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