Achievements of Research Area I

The research within Research Area I broadly followed the main themes outlined in the initial proposal. It yielded numerous publications in the profession’s most prestigious general-interest or top field journals. Many of these publications were authored or co-authored by young researchers (see details below). A particular focus was put on the complex case of multidimensional mechanism design, with applications to taxation of individuals with multiple characteristics, multiobject auctions, and the provision of multiple public goods. To give just one example, in a rare achievement, Beaudry, Blackorby and Szalay [I:BBS09] were able to completely solve a twodimensional model of optimal taxation where deviations in one dimension are constrained to be one-sided.

Hellwig [I:Hel10] offers a unified approach to studying the interplay between information and incentives in a static mechanism design setting with hidden characteristics, while dispensing with the many assumptions traditionally imposed in such a model. Besides such important contributions to well established research themes, there are several papers in Research Area I that advance into rapidly developing new fields, e.g. that combine game theoretical or mechanism design methods with concepts from bounded complexity, bounded rationality, or behavioural economics. Heidhues and Köszegi [I:HK10] and Dufwenberg et al. [I:DHK+11] investigate the consequences of other-regarding preferences and self-control problems in market settings. Herweg, Müller and Weinschenk [I:HMW10] – co-authored by three graduate students and published in the profession’s premier outlet – introduce expectation-based risk aversion to the classical principal-agent contracting problem and derive the optimality of simple, binary contracts (even for rich environments). Riedel [I:Rie09] pioneers the study of ambiguity in optimal stopping problems and characterised the ensuing optimal policies. These are outstanding achievements.

Yet another rapidly developing theme focuses on dynamic aspects in games and mechanisms where the time structure is made explicit, and where agents acquire information and/or interact over time. Gershkov and Moldovanu [I:GM09] and Nocke, Peitz and Rosar [I:NPR11] study environments where consumers arrive over time. Using mechanism design tools, they analyze price dynamics that maximize either welfare or revenue. Klein and Rady [I:KR11] study strategic experimentation with two-armed bandits when, in contrast to the previous literature, good news for one player is bad news for the other. They obtain surprising results on the structure and welfare properties of equilibria and show that strategic behaviour need not prevent complete learning in the long run.

Finally, several contributions compare well-known, intuitive schemes in applied settings (such as bargaining, pricing, financial markets, tournaments, matching markets, contract and tort law) without pursuing a full mechanism design analysis. For example, Heidrun Hoppe, Moldovanu and Sela [I:HMS09] use majorization inequalities among linear functions of order statistics in order to compare the agents’ welfare in a random matching to that in assortative matching based on costly signals. It turns out that for all distributions of attributes having an increasing hazard rate, welfare is higher in random matching.

It is worth noting that a large number of publications in Research Area I were (co-)authored by young, untenured researchers. Examples are Sophie Bade, Haeringer and Renou [I:BHR09], Garratt, Tröger and Zheng [I:GTZ09], Gershkov, Li and Schweinzer [I:GLS09], Kovac and Mylovanov [I:KM10], Krähmer and Strausz [I:KS11], Susanne Ohlendorf [I:Ohl09], Westkamp [I:Wes10], Zapechlenyuk [I:Zap08]. Other publications grew out of the cooperation among senior and junior researchers, e.g. Alia Gizatulina and Hellwig [I:GH10].

A main event for Research Area I was the HIM Trimester Programm on Mechanism Design and Related Topics organized in 2009. Many top researchers gathered in Bonn, some of them for longer periods of time, among them Maskin (IAS Princeton, Nobel Prize 2007), Milgrom (Stanford), Morris (Princeton), Bergemann (Yale), Vohra (Northwestern), Välimäki (Helsinki), Jehiel (UCL), Crawford (Oxford), Pakes (Harvard), Hörner (Yale), Biais (Toulouse), Moulin (Duke) and Wolinsky (Northwestern). The program hosted three main workshops (one of them organized jointly with MPIRCG) summer school for PhD students and young postdocs (organized jointly with the BGSE), as well as public lectures and tutorials for PhD students held by Maskin.

In June 2011 HIM hosted an international conference on ‘Gaming Incentive Systems: Theory and Evidence’, organized by Jehiel (UCL), Margaret Meyer (Oxford), Newman (BU), and Gall. Gaming is in fact an anomaly for positive economic theory, which proceeds as if the mechanism designer had sufficient knowledge of the environment to correctly forecast agents’ behaviour: in equilibrium, there should be no gaming anymore. As the conference showed, it is essential to accommodate the possibility that designers learn about their environments by observing and taking into account gaming behavior. Besides technical challenges, this raises important policy questions about regulating the flow of information across relationships. Finally, we were also able to finance a very lively visitor’s program. Among the highlights, we can mention (just in 2010!): two separate visits/lectures by Aumann (Jerusalem, Nobel Prize 2005) and one each by Myerson (Chicago, Nobel Prize 2007) and Fudenberg (Harvard).