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A Subsidized Vickrey Auction for Cost Sharing

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  • Jesse A. Schwartz

    ()
    (Department of Economics, Kennesaw State University)

  • Quan Wen

    ()
    (Department of Economics, Vanderbilt University)

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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.accessecon.com/pubs/VUECON/vu07-w05.pdf
File Function: First version, 2007
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Bibliographic Info

Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics 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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Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

Related research

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

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References

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  1. d'ASPREMONT, Claude & GERARD-VARET, Louis-André, . "Incentives and incomplete information," CORE Discussion Papers RP -354, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Laura Razzolini & Michael Reksulak & Robert Dorsey, 2007. "An Experimental Evaluation of the Serial Cost Sharing Rule," Theory and Decision, Springer, vol. 63(3), pages 283-314, November.
  3. 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.
  4. McAfee, R. Preston, 1992. "A dominant strategy double auction," Journal of Economic Theory, Elsevier, vol. 56(2), pages 434-450, April.
  5. Lawrence M. Ausubel & Paul Milgrom, 2002. "Ascending Auctions with Package Bidding," Working Papers 02004, Stanford University, Department of Economics.
  6. Moulin, Herve & Shenker, Scott, 1992. "Serial Cost Sharing," Econometrica, Econometric Society, vol. 60(5), pages 1009-37, September.
  7. 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.
  8. Eric Friedman & Moulin, Herve, 1995. "Three Methods to Share Joint Costs or Surplus," Working Papers 95-38, Duke University, Department of Economics.
  9. 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.
  10. Milgrom, Paul R & Weber, Robert J, 1982. "A Theory of Auctions and Competitive Bidding," Econometrica, Econometric Society, vol. 50(5), pages 1089-1122, September.
  11. McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
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