ECO2801: Auctions and Market Design

Abstract

This course introduces various economic design problems as applications of microeconomic theory. Many economic problems involve informational asymmetry; that is, two or more economic agents have different pieces of information so that they have difficulties in making coordinated actions. Examples include auctions, where auctioneers do not know the preferences of bidders. Auctioneers thus may not be able to allocate or prices items appropriately. Another example is the NYC’s centralized public-school admission process: the NYC Department of Education needs to know the preferences of students (or often their parents) over public schools for efficiently allocation of school seats The above two examples are also examples of market design problems. The field of market design involves the design of (often optimal) auctions in various contexts, such as (Dutch) flower auctions, M&A auctions, oil and gas lease auctions, US treasury bill auctions, spectrum auctions, and internet advertising auctions (as in Google and Bing). Market design also studies the allocation of not-for-sale items, such as seats at public schools, office spaces, and even human organs for transplants. These allocation problems are often referred to as matching problems. Market design is indeed built upon more basic theories of asymmetric information. The theory of contracts offers reasonable solutions to problems that involve asymmetric information. There are two major categories of asymmetric information: moral hazard (or hidden action), and adverse selection (or hidden information). Before examining auctions and matching problems, we first study the contract theory and learn how to control incentives of economic agents by appropriately designing their decision problems. The math used in this course is relatively sophisticated, but economic implications are more emphasized.