Essays on designing economic mechanisms.

Abstract

This dissertation consists of three chapters on different economic mechanisms. Chapter one uses a dynamic approach to discuss out-of-equilibrium behavior of compensation mechanisms which are designed for efficient allocations when externalities exist. In the basic dynamic model, agents are assumed to behave myopically when forming strategies. This assumption is justified by some recent experimental results and that agents might not have complete information. In a revised model of compensation mechanism, the resulting game is supermodular and therefore behavior assumptions could be dropped to study dynamic stability in that system. We identify conditions where these mechanisms yield stable results under dynamic adjustment processes. We discuss how our results could help public policy-making processes. Some extensions to the basic model are also discussed. Chapter two discusses the scWALRAS algorithm, which calculates competitive equilibria via a distributed tatonnement-like process, where agents submit single-good demand functions to market-clearing auctions. The algorithm is asynchronous and decentralized with respect to both agents and markets, making it suitable for distributed implementation. We present a formal description of this algorithm, and prove that it converges under the standard assumption of gross substitutability. We relate our results to the literature on general equilibrium stability and some more recent work on decentralized algorithms. We present some experimental results as well, particularly for cases where the assumptions required to guarantee convergence do not hold. Finally, we consider some extensions and generalizations to the scWALRAS algorithm. In chapter three, we propose a two-price equilibrium mechanism and apply it to economies with discrete production possibility frontiers where the traditional Walrasian mechanism fails to yield an equilibrium outcome. We show that a price-based mechanism could be designed to achieve allocations with desirable though not necessarily optimal results in economies with discrete production sets. Our mechanism provides a useful way of dealing with indivisibilities in production for designing computational markets. We demonstrate the applicability of our method with a detailed example. We discuss welfare properties of such proposed two-price equilibria as well as extensions of our basic mechanism.