Economics
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Item Essays on the Cognitive Foundations of Economics(2024) Yegane, Ece; Masatlioglu, Yusufcan; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)In Chapter 1, I model a decision maker who observes available alternatives according to a list and stochastically forgets some alternatives. Each time the decision maker observes an item in the list, she recalls previous alternatives with some probability, conditional on those alternatives being recalled until this point. The decision maker maximizes a preference relation over the set of alternatives she can recall. I show that if every available alternative is chosen with strictly positive probability, the preference order and the list order must coincide in any limited memory representation. Under the full support assumption, the preference ordering, the list ordering and the memory parameters are uniquely identified up to the ranking of the two least preferred alternatives. I provide conditions on observable choice probabilities that characterize the model under the full support assumption. I then apply our model to study the pricing problem of a monopolist who faces consumers with limited memory. I show that when the probability of forgetting is high, the monopolist is better off charging a lower price than the optimal price in the perfect memory case. In Chapter 2, Yusufcan Masatlioglu and I study how the allocation of attention to different options and the accessibility of options from memory affect decision making. To distinguish between attention and memory, we propose a two-stage stochastic consideration set formation process. An alternative enters the decision maker’s consideration set if it is investigated in the initial attention stage and is remembered in the subsequent recall stage. In the initial attention stage, the decision maker investigates each available alternative with some alternative-specific probability. In the recall stage, the decision maker recalls each alternative that she investigated in the attention stage with some probability. The probability of recalling an alternative depends on the memorability of the alternative and its position in the order of investigation in the attention stage. Investigating an alternative more recently enhances the probability of recalling it. The decision maker chooses the option that maximizes her preference relation over her consideration set. Under the assumption that the investigation of alternatives is observable, we provide testable implications on choice behavior and show that the revealed preference, attention parameters and memory parameters can be uniquely identified from observable repeated choices.Item Microeconomic Model Analyses(2023) Ellis, Keaton Hyuckmin Kweon; Ozbay, Erkut; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)The first chapter, joint with Dr. Shachar Kariv and Professor Erkut Ozbay, compares thepredictive performance of a standard economic model to a variety of machine learning models by presenting nearly 1,000 subjects with a consumer decision problem – the selection of a bundle of contingent commodities from a budget set. Our dataset allows us to compare predictions at the individual level and relate them to the consistency of individual decisions with revealed preference axioms. Using dual measures of completeness and restrictiveness from Fudenberg et al. (2022a,b), we show that the economic model outperforms all machine learning models, with a wider margin as choices align more with an underlying preference ordering. The second chapter, joint with Professor Emel Filiz-Ozbay and Erkut Ozbay, empirically investigates the consideration and choice functions behaviors of individuals under uncertainty. Our design elicits these functions by repeating the decisions repeatedly questioning subjects in a rich lottery domain and, hence, allows subjects to reveal their stochastic or deterministic consideration and choice. Since most subjects act stochastically in both consideration and choice decisions, we focus on testing well-known axioms defined for such behavior. Our analysis includes individual-level testing of the logit model (Brady and Rehbeck (2016)), and the axioms of monotonic attention (Cattaneo et al. (2020)), and attention overload (Cattaneo et al. (2021)) for the consideration data. For the choice data, we test properties including the independence of irrelevant alternatives (Luce (1959)), regularity (Block et al. (1959)) and consistency with the attribute rule (Gul et al. (2014)). The third chapter, joint with Dr. Shachar Kariv and Professor Erkut Ozbay, extends work frmo the first chapter. We make use of rich individual-level data sets from three budgetary choice environments. The environments provide a strong test of both the intra-economic model comparisons, as well as a comparison between economic models and machine learning models. Overall, we find that the extension from two goods to three goods does not greatly reduce completeness, but does greatly increase the restrictiveness. Both standard and behavioral economic models see larger increases in restrictiveness compared to machine learning models, and a lower drop in completeness when moving from two goods to three goods. Surprisingly, there is no additional drop in completeness when moving from choice under risk to choice under ambiguity in this environment; the completeness and restrictiveness scores of all models are nearly identical across the two domains, and the minor differences that are present favor models under ambiguity. We interpret these results as favorable for standard economic models in rich choice environments: absent external factors, economic models with one parameter detailing risk preferences are sufficient to capture individual-level behavior of choice under risk and choice under ambiguity. Additionally, these models are more restrictive than machine learning models; along with the high completeness, this result indicates that the assumptions of EUT and SEU capture the regularities in choice under risk and ambiguity.Item Essays on Speculation, Joint Bidding, and Dynamic Entry in Auctions(2023) Deng, Shanglyu; Ausubel, Lawrence; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation consists of three essays on auction design. In Chapter 1, I provide an introduction for the following chapters. In Chapter 2, I examine speculation in procurement auctions, where speculators may have the incentive to acquire items from multiple sellers prior to the auction in order to increase their market power and reduce competition during the auction. I show that the profitability of the speculation scheme hinges on the auction format: Speculation always generates a positive expected profit in second-price auctions but could be unprofitable in first-price auctions. This comparison in profitability is driven by different competition patterns in the two auction mechanisms. In terms of welfare, speculation causes private value destruction and harms efficiency. Sellers benefit from the acquisition offer made by the speculator. Therefore, speculation comes at the expense of the auctioneer. In Chapter 3, I consider a procurement setting where suppliers may be functionally complementary, meaning they need to collaborate to complete a complex project. I compare two methods for incorporating complementary firms into procurement auctions: allowing them to bid jointly or using combinatorial auctions, such as the VCG auction, to coordinate their collaboration. The joint bidding approach leads to a double marginalization problem, as the prime contractor must elicit private cost information from subcontractors, and then submit a bid on behalf of the group. Consequently, the joint bidding approach often underperforms the VCG auction in several aspects, including efficiency, procurement price, and support for small businesses. Chapter 4 presents both theoretical and empirical analyses for recurring auctions. Auctions for durable assets, such as land, house, or artwork, are commonly recurring, as the seller often holds a subsequent auction after a previous attempt fails. Theoretical results show that recurring auctions outperform single-round auctions in terms of efficiency and revenue when potential buyers face costly entry. This occurs because recurring auctions allow potential buyers with different values to enter at different times, which generates savings in entry costs and increases the overall probability of sale. Additionally, optimal reserve price sequences are derived for recurring auctions based on whether the seller aims to maximize efficiency or revenue. In the empirical analysis, the theory is applied to home foreclosure auctions in China, where foreclosed homes are auctioned up to three times in a row. The study identifies the structural parameters in a recurring auction model and compares the observed recurring auctions to counterfactual single-round auctions. The results are in line with theoretical predictions, showing a significant improvement in efficiency and revenue for recurring auctions over single-round auctions. Using the optimal reserve price sequences derived from our model can further enhance the performance of recurring auctions in practice.Item Essays on Multi-Dimensional Obviously Regret-Proof Mechanisms(2020) Lin, Tzu-Yao; Ausubel, Lawrence M; Economics; Digital Repository at the University of Maryland; University of Maryland (College Park, Md.)This dissertation study strategically simple mechanisms for problems of multi-dimensional allocation. Strategic simplicity is crucial to make mechanisms robust to avoid mistakes and manipulation. However, the current literature on the analysis and implementation of strategically simple mechanisms is limited, especially for markets with many goods and services. This dissertation fills this gap with three complementary but stand-alone chapters. In Chapter 1, we identify and formalize the criteria for strategic simplicity. Then we combine those criteria into a new solution concept and propose a new class of mechanism that satisfies these criteria. In Chapter 2, we analyze the cost of enforcing this new notion of simplicity. In Chapter 3, we show that the new mechanism is a good candidate in an application with substantial welfare implications. The solution concept we propose in Chapter 1 is called obvious regret-proofness (ORP). It describes conditions that regulate both the extensive form of a dynamic game and the communication between the auctioneer and the bidders. Those conditions make sure that there is a simple rule for bidders to determine his best action each time he is called to play. Also, it is easy for the bidder to understand and to verify that he will not regret choosing this action because the optimality of this action does not depend on the choices of other bidders. We then translate those requirements into auction rules and propose a new class of mechanisms called Persistent Exit Descending (PED) mechanisms. Then in Chapter 2, we analyze the cost of pursuing strategic simplicity by implementing the PED mechanism. We first show that for an efficient strategy-proof mechanism, the allocation and payment to a bidder can be dependent on the reports of other bidders. This influence is monotonic and mutual. Therefore, the externality of a bidder’s choice can be internalized. In contrast, the influence in PED implementable mechanisms is restricted once the reports of other bidders exceed some certain thresholds. Moreover, the influence can only be one-sided, which means that if a bidder has influence over the other bidder, only if that bidder cannot influence him. Lacking the channel to influence, the decision of a bidder cannot take into account his externality to other bidders. This is the primary source of welfare loss in a PED mechanism. In Chapter 3, we show that the PED mechanism proposed in Chapter 1 is a good candidate for land assembly problems. It has the properties that most of the land assembly mechanisms in the literature fail to have, but are fundamental to land assembly problems. First, it is strategically simple. Second, its allocation rule is combinatorial. Third, it can assign non-monetary compensations to a bidder. Finally, it fully respects the owners' property rights, and it is ex-post individual rational. We then tailor the PED mechanism to the land assembly problem and apply the analytical framework from Chapter 2 to discuss the advantages and limitations of using the PED mechanism in land assembly problems.