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Allocation, externalities, and the fair division approach: An experimental study

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  • Torsten Weiland

    () (Max Planck Institute of Economics)

Abstract

We experimentally investigate four allocation mechanisms - all based on the fair division approach, with varying bid elicitation methods and price rules - in terms of their allocation efficiency, distributional effects, and regularities in individual bidding behavior. In a repeated design, an indivisible good is assigned that generates profits for its owner but, at the same time, exerts negative externalities on the non-acquiring bidders. Both the bidders' valuations of the good and their potentially incurred damages are stochastic and denote private information, inciting strategic bidding and complicating an efficient allocation. Indeed, observed bidding is dominated by strategic reporting which, however, only marginally diminishes efficiency. One particular allocation mechanism, relying on sparse information elicitation and the first-price rule, is found to yield economically superior results to both more complex and second-price based allocation mechanisms.

Suggested Citation

  • Torsten Weiland, 2008. "Allocation, externalities, and the fair division approach: An experimental study," Jena Economic Research Papers 2008-030, Friedrich-Schiller-University Jena.
  • Handle: RePEc:jrp:jrpwrp:2008-030
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    File URL: http://zs.thulb.uni-jena.de/receive/jportal_jparticle_00099131
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    Keywords

    Allocation; auction; fair division; externalities; experiment;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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