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Subsidies, Knapsack Auctions and Dantzig’s Greedy Heuristic

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  • Ensthaler, Ludwig
  • Giebe, Thomas

Abstract

A budget-constrained buyer wants to purchase items from a shortlisted set. Items are differentiated by quality and sellers have private reserve prices for their items. Sellers quote prices strategically, inducing a knapsack game. The buyer’s problem is to select a subset of maximal quality. We propose a buying mechanism which can be viewed as a game theoretic extension of Dantzig’s greedy heuristic for the classic knapsack problem. We use Monte Carlo simulations to analyse the performance of our mechanism. Finally, we discuss how the mechanism can be applied to award R&D subsidies.

Suggested Citation

  • Ensthaler, Ludwig & Giebe, Thomas, 2009. "Subsidies, Knapsack Auctions and Dantzig’s Greedy Heuristic," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 254, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:254
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    File URL: https://epub.ub.uni-muenchen.de/13298/1/254.pdf
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    References listed on IDEAS

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    1. Giebe, Thomas & Grebe, Tim & Wolfstetter, Elmar, 2006. "How to allocate R&D (and other) subsidies: An experimentally tested policy recommendation," Research Policy, Elsevier, vol. 35(9), pages 1261-1272, November.
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    Keywords

    Auctions; Subsidies; Market Design; Knapsack Problem;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D45 - Microeconomics - - Market Structure, Pricing, and Design - - - Rationing; Licensing

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