Designing the Digital Economy


digital-economy_450Designing the Digital Economy (DDE) is a day-and-a-half long conference bringing leading economists to Microsoft Research New England’s interdisciplinary economics research environment to discuss the new market designs technology is enabling.

DDE will be held immediately following the NBER’s Market Design meetings. The workshop is open to everyone and registration is free of charge. Continental breakfast and lunch will be served, as well as coffee as appropriate to timing on both days.


Continental breakfast and lunch will be served, as well as coffee as appropriate to timing on both days.

Saturday, October 24, 2015 registration and lunch begin at 12:30pm. Dinner at 7:00pm that evening for directly invited guests only at Area Four (500 Technology Square, Cambridge). Sunday breakfast begins at 8:30am. Event concludes at 5pm on Sunday.

Saturday, October 24

12:30pm – 2:00
Registration and Lunch

2:00 – 2:15
Welcome by Glen Weyl

2:15 – 3:15
Can “Complex” Market Designs Make it from Theory to Practice? Changing the Course Allocation Mechanism at Wharton by Eric Budish, discussed by Joshua Mollner

Budish (2011) proposes a new mechanism for the problem of combinatorial assignment — e.g., assigning students to schedules of courses — called approximate competitive equilibrium from equal incomes (CEEI). While the CEEI mechanism satisfies attractive properties of efficiency, fairness, and incentives, it is “complicated” in several ways that one might reasonably wonder whether the theory could actually be implemented in the real world. To give just a few examples, agents are assumed to report their complete preferences over all possible schedules of courses, the mechanism is assumed to solve a high-dimensional approximate Kakutani fixed point problem, and all of the economic properties the mechanism satisfies involve approximations. While there is no perfect definition of a mechanism’s complexity, for a contrast consider the famous Gale-Shapley deferred acceptance algorithm, which is sufficiently simple to imagine implementing in practice that the medical profession actually did so some fifteen years before Gale and Shapley’s paper was even published.

This talk reports on two papers that helped bring this complex market design theory to successful implementation in practice, at the Wharton School at the University of Pennsylvania. The first paper, joint with Judd Kessler, reports on experiments conducted at Wharton to test the CEEI mechanism. In addition to showing that the CEEI mechanism improved the efficiency and fairness of the allocation, the experiment also serves as a roadmap for other market design researchers seeking to test complex mechanisms in practice. The second paper, joint with Gerard Cachon, Judd Kessler, and Abe Othman, reports on the computational and economic engineering work involved in actually implementing the mechanism in practice. This involved modifications of the CEEI mechanism to deal with some of the issues caused by approximations in the theory, and a computational procedure that performs a massive parallel heuristic search, solving billions of mixed-integer programs along the way, to output an approximate competitive equilibrium in the fake-money economy for courses.

3:15 – 3:30
Coffee Break

3:30 – 4:30
“Cheap Talk, Round Numbers, and the Economics of Negotiation” presented by Matt Backus (joint work with Thomas Blake and Steven Tadelis), discussed by Etan Green

Can sellers credibly signal their private information to reduce frictions in negotiations? Guided by a simple cheap-talk model, we posit that impatient sellers use round numbers to signal their willingness to cut prices in order to sell faster, and test its implications using millions of online bargaining interactions. Items listed at multiples of $100 receive offers that are 5%–8% lower but that arrive 6–11 days sooner than listings at neighboring “precise” values, and are 3%–5% more likely to sell. Similar patterns in real estate transactions suggest that round-number signaling plays a broader role in negotiations.

4:30 – 5:00
Coffee Break

5:00 – 6:00
“Adverse Selection and Auction Design for Internet Display Advertising” Presented by Paul Milgrom (joint work with Nick Arnosti and Marissa Beck), discussed by Bobby Kleinberg

We model an online display advertising environment with brand advertisers and better-informed performance advertisers, and seek an auction mechanism that is strategy-proof, anonymous and insulates brand advertisers from adverse selection. We find that the only such mechanism that is also false-name proof assigns the item to the highest bidding performance advertiser only when the ratio of the highest bid to the second highest bid is sufficiently large. For fat-tailed match-value distributions, this new mechanism captures most of the gains from good matching and improves match values substantially compared to the common practice of setting aside impressions in advance.

7:00 – late
Dinner at Area Four

Sunday, October 25

8:30am – 9:00

9:00 – 10:00
“Mixed Pricing in Online Marketplaces” presented by Michael Sinkinson (joint work with Katja Seim), discussed by Bruno Strulovici.

A rich theory literature predicts mixed pricing in various settings due to standard price discrimination, search frictions, and various other rationales. While typically interpreted as implying occasional sales or price dispersion, online marketplaces enable a firm to truly use randomization as a tool in pricing. We investigate a case of mixed pricing across a large subset of products on a major e-commerce website. We first test for randomizing behavior, before constructing a model of price discrimination that would generate such behavior as optimizing behavior. We estimate the model and use it to assess pricing effects of a proposed merger in the industry.

10:00 – 10:15
Coffee Break

10:15 – 11:15
“Real Time Pricing and Labor Supply in the Sharing Economy” by Chris Nosko, discussed by Ricardo Perez-Truglia

11:15 – 11:30
Coffee Break

11:30 – 12:30
“Surveillance and System Avoidance: Criminal Justice Contact and Institutional Attachment” by Sarah Brayne, discussed by Parag Pathak

The degree and scope of criminal justice surveillance increased dramatically in the United States over the past four decades. Recent qualitative research suggests the rise in surveillance may be met with a concomitant increase in efforts to evade it. To date, however, there has been no quantitative empirical test of this theory. In this article, I introduce the concept of “system avoidance,” whereby individuals who have had contact with the criminal justice system avoid surveilling institutions that keep formal records. Using data from Add Health (n = 15,170) and the NLSY97 (n = 8,894), I find that individuals who have been stopped by police, arrested, convicted, or incarcerated are less likely to interact with surveilling institutions, including medical, financial, labor market, and educational institutions, than their counterparts who have not had criminal justice contact. By contrast, individuals with criminal justice contact are no less likely to participate in civic or religious institutions. Because criminal justice contact is disproportionately distributed, this study suggests system avoidance is a potential mechanism through which the criminal justice system contributes to social stratification: it severs an already marginalized subpopulation from institutions that are pivotal to desistance from crime and their own integration into broader society.

12:30 – 1:30

1:30 – 2:00
Overview of Empirical Economics program, led by Susan Athey, but also featuring Greg Lewis, Markus Mobius, Denis Nekipelov and Justin Rao

2:00 – 3:00
“Consensus Expectations and Conventions” presented by Ben Golub (joint work with Stephen Morris), discussed by Muhamet Yildiz.

Players have uncertainty over both an external random variable — such as a security price — and over each other’s beliefs. We study agents’ subjective expectations of the weighted average of others’ subjective expectations…of the weighted average of others’ subjective expectations of the external random variable. The weights involved can be viewed as a network. By relating these iterated average expectations to a Markov chain, we characterize their limit properties, generalizing prior results on games with common priors and complete-information network games. We then apply the conclusions to study coordination games, over-the-counter financial markets, the possibility of rationalizable trade, and the robustness of equilibrium.

3:00 – 3:15
Coffee Break

3:15 – 4:15
“Sales Mechanisms in Online Markets: What Happened to Internet Auctions?” presented by Liran Einav, discussed by Justin Rao.

Consumer auctions were very popular in the early days of internet commerce, but today online sellers mostly use posted prices. Data from eBay shows that compositional shifts in the items being sold, or the sellers offering these items, cannot account for this evolution. Instead, the returns to sellers using auctions have diminished. We develop a model to distinguish two hypotheses: a shift in buyer demand away from auctions, and general narrowing of seller margins that favors posted prices. Our estimates suggest that the former is more important. We also provide evidence on where auctions still are used, and on why some sellers may continue to use both auctions and posted prices.

4:15 – 4:30
Closing remarks by Greg Lewis