Market design uses economic theory to improve the function of real-world marketplaces, such as matching systems and auctions. In many markets, participants trade goods which are indivisible and highly heterogeneous. My focus is on settings in which participants also experience “income effects”. Income effects arise when participants face budget constraints or when transactions substantially affect participants’ wealth. Income effects are present in many important markets: from spectrum licenses and airport landing slots to jobs and houses. But designing well-functioning marketplaces for participants who experience income effects is challenging both in theory and in practice. As a result, income effects are often ignored in marketplace design, leading to unfair and inefficient outcomes.
The goal of DUALMARKETS is to understand how to design fair and efficient marketplaces for participants with diverse preferences and income effects. Marketplaces work well when supply equals demand and when participants cannot improve their outcomes by renegotiating. First, I will develop powerful novel conditions on participants’ preferences which allow for income effects and guarantee that market-clearing prices always exist. Second, I will analyse to what extent outcomes in multi-sided matching markets are robust to cooperative renegotiation among unsatisfied participants.
To achieve these two objectives, I will establish a Competitive Equilibrium Existence Duality and a Cooperative Solution Concept Duality between economies with and without income effects. Finally, I will explore applications of these Dualities to auction design. Specifically, I will develop several designs of sealed-bid multi-item auctions in which bidders can experience income effects. The new connections between competitive equilibrium, matching markets, and auctions developed in DUALMARKETS will substantially enrich the market design toolkit to better cope with the diversity of real-world preferences.
The research project is supported by the European Research Council
ERC-2020-StG – 949699