Centralized Clearinghouse Design: A Quantity-Quality Tradeoff (Job Market Paper)
Stable matching mechanisms are used to clear many two-sided markets. This paper studies how the quantity and quality of matches formed in these markets are affected by correlations in agent preferences. I consider three canonical preference structures: fully idiosyncratic preferences, common preferences (agents agree on the attractiveness of those on the opposite side), and aligned preferences (potential partners agree on the attractiveness of their match).
I find that idiosyncratic preferences result in more matches than common preferences do. Perhaps more surprisingly, the case of aligned preferences leads to the fewest matches. Regarding match quality, the story reverses itself: aligned preferences produce the most high quality matches, followed by common preferences. These facts have implications for the design of priority structures and tie-breaking procedures in school choice settings, as they point to a fundamental tradeoff between matching many students, and maximizing the number of students who get one of their top choices.
Auctions, Adverse Selection, and Internet Display Advertising (with Marissa Beck and Paul Milgrom)
We model an online display advertising environment in which "performance" advertisers can measure the value of individual impressions, whereas "brand" advertisers cannot. If advertiser values for ad opportunities are positively correlated, second-price auctions for impressions can be very inefficient. Bayesian-optimal auctions are complex, introduce incentives for false-name bidding, and disproportionately allocate low-quality impressions to brand advertisers. We introduce "modified second bid" auctions as the unique auctions that overcome these disadvantages.
When advertiser match values are drawn independently from heavy tailed distributions, a modified second bid auction captures at least 94.8% of the first-best expected value. In that setting and similar ones, the benefits of switching from an ordinary second-price auction to the modified second bid auction may be large, and the cost of defending against shill bidding and adverse selection may be low.
Managing Congestion in Matching Markets (with Ramesh Johari and Yash Kanoria)
Participants in matching markets face search and screening costs which prevent the market from clearing efficiently. In many settings, the rise of online matching platforms has dramatically reduced the cost of finding and contacting potential partners. While one might expect both sides of the market to benefit from reduced search costs, this is far from guaranteed. In particular, this change may force participants to screen more potential partners before finding one who is willing to accept their offer. Thus, for a fixed screening cost, reductions in search and application costs may actually decrease aggregate welfare.
We illustrate this fact using a model in which agents apply and screen asynchronously. In our model, it is possible that an agent on one side of the market (an "employer") identifies a suitable match on the other side (an "applicant"), only to find that this applicant has already matched. We find that equilibrium is generically inefficient for both employers and applicants. Most notably, when application costs are sufficiently small, uncertainty about applicant availability may drive equilibrium employer welfare to zero.
We consider a simple intervention available to the platform: limiting the visibility of applicants. We find that this intervention can significantly improve the welfare of agents on both sides of the market; applicants pay lower application costs, while employers are less likely to find that the applicants they screen have already matched. Somewhat counterintuitively, the benefits of showing fewer applicants to each employer are greatest in markets in which there is a shortage of applicants.
The (Non)-Existence of Stable Mechanisms in Incomplete Information Environments
(With Nicole Immorlica and Brendan Lucier. To appear at WINE 2015.)
We consider two-sided matching markets, and study the incentives of agents to circumvent a centralized clearing house by signing binding contracts with one another. It is well-known that if the clearing house implements a stable match and preferences are known, then no group of agents can profitably deviate in this manner.
We ask whether this property holds even when agents have incomplete information about their own preferences or the preferences of others. We find that it does not. In particular, when agents are uncertain about the preferences of others, every mechanism is susceptible to deviations by groups of agents. When, in addition, agents are uncertain about their own preferences, every mechanism is susceptible to deviations in which a single pair of agents agrees in advance to match to each other.
Welfare-Improving Cascades and the Effect of Noisy Reviews
(With Daniel Russo. Appeared at WINE 2013.)
We study a setting in which firms produce items whose quality is ex-ante unobservable, but learned by customers over time. Firms take customer learning into account when making production decisions. We focus on the effect that the review process has on product quality. Specifically, we compare equilibrium quality levels in the setting de- scribed above to the quality that would be produced if customers could observe item quality directly. We find that in many cases, customers are better off when relying on reviews, i.e. better off in the world where they have less information. The idea behind our result is that the risk of losing future profits due to bad initial reviews may drive firms to produce an exceptional product. This intuitive insight contrasts sharply with much of the previous academic literature on the subject.