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A Subsidized Vickrey Auction for Cost Sharing

  • Jesse A. Schwartz

    ()

    (Department of Economics, Kennesaw State University)

  • Quan Wen

    ()

    (Department of Economics, Vanderbilt University)

Registered author(s):

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
Download Restriction: no

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
Contact details of provider: Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

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  1. McAfee, R. Preston., 1990. "A Dominant Strategy Double Auction," Working Papers 734, California Institute of Technology, Division of the Humanities and Social Sciences.
  2. McAfee, R. Preston & McMillan, John., 1990. "Bidding Rings," Working Papers 726, California Institute of Technology, Division of the Humanities and Social Sciences.
  3. Eric Friedman & Moulin, Herve, 1995. "Three Methods to Share Joint Costs or Surplus," Working Papers 95-38, Duke University, Department of Economics.
  4. 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.
  5. Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
  6. Lawrence M. Ausubel & Paul Milgrom, 2002. "Ascending Auctions with Package Bidding," Working Papers 02004, Stanford University, Department of Economics.
  7. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721.
  8. Hervé Moulin & Scott Shenker, 2001. "Strategyproof sharing of submodular costs:budget balance versus efficiency," Economic Theory, Springer, vol. 18(3), pages 511-533.
  9. Paul Milgrom & Robert J. Weber, 1981. "A Theory of Auctions and Competitive Bidding," Discussion Papers 447R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Moulin, Herve & Shenker, Scott, 1992. "Serial Cost Sharing," Econometrica, Econometric Society, vol. 60(5), pages 1009-37, September.
  11. 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.
  12. d'Aspremont, Claude & Gerard-Varet, Louis-Andre, 1979. "Incentives and incomplete information," Journal of Public Economics, Elsevier, vol. 11(1), pages 25-45, February.
  13. 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.
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