College Admission with Multidimensional Privileges: The Brazilian Affirmative Action Case

In 2012, Brazilian public universities were mandated to use affirmative action policies for candidates from racial and income minorities. We show that the policy makes the students’ affirmative action status a strategic choice and may reject high-achieving minority students while admitting low-achieving majority students. Empirical data shows evidence consistent with this type of unfairness in more than 49 percent of the programs. We propose a selection criterion and an incentive-compatible mechanism that, for a wider range of similar problems and the one in Brazil in particular, is fair and removes any gain from strategizing over the privileges claimed. (JEL I23, O15, I28, J15, D82, H52)

Mechanism Design for Managing Hidden Rebates and Inflated Quotes of a Procurement Service Provider

Problem definition: When sourcing through a procurement service provider (PSP), the PSP often collects rebates from unethical manufacturers in developing countries (as referral fees) that are “hidden” from the retailers. Recognizing that a PSP has a strong incentive to solicit quotes from unethical manufacturers, we examine a situation in which the retailer insists on soliciting a quote from a manufacturer designated by the retailer and a separate quote from an unethical manufacturer selected by the PSP. However, when the designated manufacturer is ethical, the PSP has an incentive to inflate the quote from this ethical manufacturer in order to help the unethical manufacturer to win. Facing this situation, is there a mechanism for the retailer to control hidden rebates? Academic/practical relevance: The issue of hidden rebates is a “known secret” in global supply chain practice. Also, hidden rebates increase the customs duty for U.S. importers because of the first sales rule for customs valuation of U.S. imports. Therefore, there is a need to understand the implications of hidden rebates and to control this unethical practice. Methodology: To circumvent the issue of hidden rebates and quote inflations, we develop a deterministic, incentive-compatible mechanism that is based on a simple selection rule (for selecting a manufacturer) and a contingent service fee (as a reward for the service provided by the PSP). Results: Our optimal mechanism creates incentives to (1) deter the PSP from inflating the quote submitted from the ethical manufacturer, (2) reduce the incidence of hidden rebates, and (3) reduce the retailer’s procurement cost and the corresponding import tax significantly. More importantly, relative to the “lowest quote wins” selection rule, the optimal mechanism is Pareto-improving for the retailer and the service provider when the hidden rebate is below a certain threshold. Furthermore, we extend our analysis to the case in which (1) the retailer is not sure whether the designated manufacturer is ethical or not, (2) the retailer does not know the exact value of hidden rebate (but it follows a two-point distribution), and (3) the retailer may verify the quote with its designated manufacturer before a formal contract. We also explore the stochastic incentive-compatible mechanism for the cases in which the penalty is unenforceable or enforceable. Managerial implications: When law enforcement is inconsistent in developing countries, retailers should beware of the existence and implications of hidden rebates. We provide a simple mechanism that a retailer can consider as a practical way to deter the PSP from inflating certain quotes and put hidden rebates under control.

Efficient and Incentive‐Compatible Liver Exchange

Liver exchange has been practiced in small numbers, mainly to overcome blood‐type incompatibility between patients and their living donors. A donor can donate either his smaller left lobe or the larger right lobe, although the former option is safer. Despite its elevated risk, right‐lobe transplantation is often utilized due to size‐compatibility requirement with the patient. We model liver exchange as a market‐design problem, focusing on logistically simpler two‐way exchanges, and introduce an individually rational, Pareto‐efficient, and incentive‐compatible mechanism. Construction of this mechanism requires novel technical tools regarding bilateral exchanges under partial‐order‐induced preferences. Through simulations we show that not only can liver exchange increase the number of transplants by more than 30%, it can also increase the share of the safer left‐lobe transplants.

Learning and Mechanism Design: An Experimental Test of School Matching Mechanisms with Intergenerational Advice

While the mechanisms that economists design are typically static, one-shot games, in the real world, mechanisms are used repeatedly by generations of agents who engage in them for a short period of time and then pass on advice to their successors. Hence, behaviour evolves via social learning and may diverge dramatically from that envisioned by the designer. We demonstrate that this is true of school matching mechanisms—even those for which truth-telling is a dominant strategy. Our results indicate that experience with an incentive-compatible mechanism may not foster truthful revelation if that experience is achieved via social learning.

Equivalence of Stochastic and Deterministic Mechanisms

We consider a general social choice environment that has multiple agents, a finite set of alternatives, independent types, and atomless type distribution. We show that for any Bayesian incentive compatible mechanism, there exists an equivalent deterministic mechanism that (1) is Bayesian incentive compatible; (2) delivers the same interim expected allocation probabilities and the same interim expected utilities for all agents; and (3) delivers the same ex ante expected social surplus. This result holds in settings with a rich class of utility functions, multidimensional types, interdependent valuations, and in settings without monetary transfers. To prove our result, we develop a novel methodology of mutual purification, and establish its link with the mechanism design literature.