Tag Archives: mechanism design

Gambling deterrence mechanism

Compulsive gambling is driven by the hope of winning a large amount, so one way to deter gambling addiction is to forbid paying out winnings to people registered as having this problem. In a one-shot interaction, casinos and lottery organisers clearly have an incentive to keep both the stakes and the winnings, but problem gambling is repeated. Sufficiently patient casinos are motivated to establish a reputation for paying out winnings, if the punishment is small or unlikely enough, because such reputation attracts other gamblers, which increases the long-run expected profit of the casino. The gamblers are not interested in reporting the casino for illegally paying out, because they benefit from the payout, and the closure of the establishment would prevent them from satisfying their craving.

However, the gamblers’ desire for big winnings, even with very low probability, can be used to motivate them to report – the law can offer a large sum to anyone who proves that a casino made an illegal payout. The reward can be financed from an even larger fine levied on the law-breaking casino. The reward should of course be in addition to any winnings of the whistleblower if the latter is a patron of the casino, because a gambler should not lose money by reporting. Gamblers are impatient, unlike casinos, so the repeated interaction with an establishment does not outweigh an immediate payout, even if collecting the payout leads to less opportunity to gamble in the future.

Overbidding incentives in crowdfunding

Crowdfunding campaigns on Funderbeam and other platforms fix a price for the shares or loan notes and invite investors to submit the quantity they want to buy. If demand exceeds supply, then the financial instruments are rationed pro rata, or investors requesting quantities below a threshold get what they asked and others receive the threshold amount plus a pro rata share in the remaining quantity after the threshold amounts are allocated. Rationing creates the incentive to oversubscribe: an investor who wants n shares and expects being rationed to fraction x of her demanded quantity will rationally put in the order for n/x>n shares to counteract the rationing. For a mechanism not to invite such manipulation, the amount allocated to a given bidder in the event of oversubscription should not depend on that bidder’s bid quantity. For example, everyone gets the minimum of their demanded amount and a threshold quantity, where the threshold is determined so as to equate demand and supply. If there are s shares and all m investors demand more than s/m, then each gets s/m.

If some investors demand less than s/m, then the allocation process is recursive as follows. The i1 investors who asked for less than s/m each get what they requested. Their total t1 is subtracted from s to get s1 and the number of remaining investors reduced to m1=m-i1. Then the i2 investors asking for less than s1/m1 get what they demanded (t2 in total), and the new remaining amount s2=s1-t2 and number of investors m2=m1-i2 determined. Repeat until the number of investors asking for less than sj/mj is zero. Divide the remaining amount equally between the remaining investors.

An alternative is to let the market work by allowing the price to adjust, instead of fixing it in advance. Everyone should then submit demand curves: for each price, how many shares are they willing to buy. This may be too complicated for the unsophisticated crowdfunding investors.

However, complexity is probably not the main reason for the inefficient allocation mechanism that invites overbidding. The crowdfunding platform wants to appear popular among investors to attract companies to raise funds on it, so wants to increase the number of oversubscribed campaigns. Rationing is a way to achieve such manipulation if the fundraisers ignore the investors’ incentives to overbid and do not compare the platform to competing ones with similar allocation mechanisms. If fundraisers are irrational in this way, then they do not choose competing platforms without overbidding incentives, because funding campaigns there seem to attract less investor interest. Competing platforms with more efficient allocation mechanisms then go out of business, which eliminates comparison possibilities.

Volunteer parking wardens may benefit the environment

Reducing the utility from car use and ownership motivates substitution towards other forms of transportation, which benefits both the environment and public health. One way to cut the convenience of driving is enforcing parking regulations, because drivers have to park further from their destination when the option of illegal parking becomes less attractive. Parking at a greater distance also makes people walk more – a minor health benefit.

Enforcing speed limits and other traffic rules that slow cars down increases the time cost of driving. This may reduce wear and tear on vehicles and roads, which benefits the environment.

An implication of is that people who want to reduce global warming or improve public health should become volunteer parking wardens and traffic police by reporting parking violations, speeding and dangerous driving (preferably with photo or video evidence from phones or dashboard cameras).

A possible countervailing effect of the enforcement of parking rules occurs if the illegally parked cars obstruct the movement of other cars enough to motivate some people to switch away from driving. Then stopping the parking violations may open the road up enough to encourage more use of cars, with an overall negative environmental and health effect. Similarly, if reckless drivers make the roads unsafe enough to reduce others’ car use, then making traffic civil again may attract risk-averse people back to driving. However, in most developed countries, illegal parking and the ignoring of rules of the road is not severe enough to deter driving significantly, so better enforcement is likely to reduce car use.

Slowing traffic down may increase congestion and emissions per kilometre travelled if there is little substitution away from driving. Again, in developed countries public transit and cycling are usually feasible options. Of course, some people always find excuses not to use these, and in remote rural areas public transit may indeed be economically unreasonable and distances may really be too great for bikes. Electric bikes are then an option. These increase the range of travel with less pollution and congestion than cars.

Spam deterrence by boycotting

The obvious reason for spam of any kind (emails, texts, phone calls, unsolicited mail) is that it is profitable. Thus spam must raise the probability that its target buys or otherwise complies with the spammer’s wishes, e.g. leaves a review. To deter spam, the incentive for it must be reversed – the targeted people should not give in to spammers, but do the opposite (not buy, not leave a review when receiving a „reminder”). I try to follow this strategy. If I remember that a business spammed me, then I try to boycott it, unless it is by far the best option (usually not, spammers are typically shady businesses and bottom-feeders).

Incentives are created by the difference in payoffs, not their level. Thus to deter spam, the buying probability should be lower for a spamming business than for a non-spamming competitor. To create this payoff difference for non-monetary actions, e.g. reviewinig, I leave a review with positive probability when not asked to do so, but certainly avoid reviewing when spammed with reminders.

If the whole society followed the strategy of boycotting spammers, then one possible concern is that spammers would start to use reverse psychology. They would spam in the name of their competitors to make them look like spammers. If customers start boycotting the competitors as a result, then demand shifts to the spammer, which is profitable.

The reverse psychology is unlikely to become a serious problem, because there are typically many competitors and the spammer would have to make most of them look bad to increase its demand significantly. Also, the law usually punishes the use of a fake name more harshly than unsolicited contacting. The competitors whose reputation is tarnished by spam under their name have a stronger incentive to sue its source than consumers just annoyed by the spam.

Neighbourhood coordinating to keep houses small and prices high

If apartment buildings are built in a neighbourhood of detached houses, then the house prices fall, especially next to the new apartment buildings. There is less privacy in the garden if many windows overlook it, and there is more congestion and crime if more people live nearby. The neighbourhood’s common interest may be to block the development of large buildings in it. However, an individual homeowner finds it profitable to sell to a property developer who will replace the detached house with a large apartment building, because the cost of reduced house prices is borne by the neighbours, not by the seller.
One way that neighbourhoods try to prevent this tragedy of the commons is to require all homeowners to join an association and agree to be bound by the rule that the association can prohibit new buildings or expansions. Such rule-based solutions are usually vulnerable to legal loopholes and changes in government policy that invalidate the restrictions. Game theory offers a solution without requiring any external enforcement: if one homeowner extends her house or replaces it with a bigger building, or sells to someone who will, then the neighbours respond by building apartment buildings around the property of the first breaker of the social norm of non-expansion. Then the view from the first expanded building is only the walls of the others, which makes the expansion unprofitable and deters enlargement in the first place.
The punishment for the first extension has to be certain enough to deter it. In particular, the homeowners next to the violator of the norm must be incentivised to build even at a loss. This incentive can be provided by requiring the neighbours of the homeowners next to the violator to punish those who do not punish the violator. This punishment can again be the development of large buildings next to their property. Those who refuse to punish the non-punishers can be punished the same way, etc, in concentric circles around the original violator.
The incentives provided by dynamic games such as this one may seem strange, but can be easily coordinated by a homeowners’ association without any legal power. The association simply publishes the rule that (a) enlargement of current buildings or the construction of new ones is forbidden and (b) if someone breaks the rule, then any new construction in a specified radius around the first rule-breaker is allowed. If one enlargement or new building is profitable, then typically a few extensions next to it are also profitable. The fewer neighbours of the first rule-breaker that build bigger houses as punishment, the more profitable an extension is for any neighbour. So some neighbours will punish the first violator. This will make the house prices of other neighbours fall, which reduces the cost to them of selling their houses to property developers for apartment building construction, i.e. reduces the cost of punishing the original rule-breaker.

Spam call deterrence

Time-wasting marketing calls to my cellphone are a bit of a problem. I have developed the habit of checking any new number against online spam call reporting websites, and if the number turns out to be a spammer, then saving it under “Spam call” in my phone. Then in the future, any call from the same number shows up on the phone as Spam call. There are probably apps for blocking numbers, but as an economist, I would prefer a tax to a ban. I would like to make callers pay me for calling me, to compensate for my time spent answering or blocking, and also to deter spam calls. In principle, charging a fee for receiving a call is possible, because there are already 1-800 numbers and others that are pricier to call than an ordinary phone.
If it was costlier to call me than most numbers, then I would refund the extra calling fee to my friends and other legitimate callers, so they would not be deterred from calling me. This is easy, because I can see the list of calls, their durations and numbers online, so can calculate how much extra each caller paid to call me. Spammers of course would not get a refund.

Unfortunately, imposing a monetary cost on spammers is infeasible for most individuals. There are now apps that block spam numbers automatically, and the user can specify additional numbers to blacklist. However, a better version of spam call deterrence is not to block the call, but to impose as large a cost on the caller as possible. A non-monetary way to punish spammers is to waste their time. If the person called pretends to be a gullible customer and keeps the spammer talking for a long time, but in the end does not buy what is being sold, then the spammer loses more than by just being blocked. Unfortunately, this also wastes time for the victim of spam, and that time is usually more valuable than the spammer’s, especially with modern robocalls and auto-dialling.

To fight fire with fire, victims of spam could have an AI on their phone respond in their stead. The time of the AI costs little, so the AI could play the part of a gullible customer, keeping the caller hopeful. The AI could say: „Tell me more,” „How much does it cost?” and other encouraging things, agree to buy what the caller is selling, provide a fake credit card number and other data. Only after a long call, entering the fake data to process the order, confirming the address, etc, would the spammer learn that no profit is forthcoming.

Similarly, AI could produce written responses to email spam to deter it. For example, provide (fake) account numbers and passwords to the self-proclaimed Nigerian prince, after asking for various confirmations and documentation.

Spam call deterrence of course is just a part of general spam deterrence, for which one way is boycotting. However, boycotts may backfire if firms spam on behalf of competitors to make them look bad, as in a false flag attack.

Gender equity either on paper or by forcing people to change research fields

Suppose that a university employs roughly equal numbers of men and women overall, but the proportions of the genders differ across research fields, or across research and administration, and the university wants gender equality within each subfield. Using the narrowest definition of a research field, each field has either one or zero people, so in the smallest fields, gender equality is impossible. From now on, the focus is on fields or administrative units that have at least two people.
Gender equity can be achieved on paper by redrawing the administrative boundaries or redefining research fields. A simple algorithm (not the only possible algorithm) is to form pairs of one male and one female employee and call each such pair an administrative unit. Larger units can be formed by adding many male-female pairs together. If the numbers of men and women are not exactly equal, then some single-gender pairs will be left over, but most administrative units will have perfect gender equality.
The same idea can be used less radically by reassigning people who do interdisciplinary work and could plausibly belong to multiple research fields. Each person who is „between” fields gets assigned to the field that has a smaller fraction of that person’s gender. This increases gender equality in both the field that the person joins and the field that the person left. The field with a bigger surplus of that person’s gender loses one of that gender, and the field with a smaller surplus gains one.
Other than reassigning people or redrawing administrative boundaries, gender equity requires inducing people to change their research fields. To some of my colleagues, directing researchers to change their area is ideologically unacceptable. However, if equity is the goal and people’s field change is necessary to achieve it, then several methods can be used. The inducements can be softer or harder. A hard inducement is a hiring policy (and job ads) that restrict hiring to only one gender. The same can be done with promotion and retention. If this policy was explicitly stated to everyone, then it would become more effective, and also more acceptable to people than when they are surprised with it upon applying for promotion.
Soft inducements consist of hints that one gender is preferred, which are usually stated in political doublespeak like „we are committed to equity” or „we are an equal opportunity employer”. If many more candidates of one gender apply, then giving all candidates an equal opportunity of getting hired does not result in equal proportions of men and women employed. I am in favour of clear guidelines and transparency, for example of explicitly stating in job ads and promotion policies that the underrepresented gender is preferred, and which gender is currently underrepresented. Clearly telling people that switching fields is good for their career is likely to have a bigger effect than the currently used hints.
It may be easier to shift the research areas of people who are earlier in their careers. Encouraging more young people of a given gender to go to an area where their gender is underrepresented is one way of inducing them to change their field (relative to their preference).
Current equity policies are focussing almost exclusively on the inflow of employees. Gender balance can also be improved by managing the outflow, for example by offering early retirement schemes to one gender, or expanding these to a wider age range for one gender. If there are gender differences in the propensity of accepting certain inducements to leave, then the same inducements can be offered to both genders (seemingly gender-neutrally), with the desired result that one gender exits more.

Incentivising refereeing

To shorten the refereeing lag and improve report quality in economics, the natural solution is to incentivise academics to do a better and quicker job. Economists respond to incentives, but currently no salary or promotion consequences arise from good or bad refereeing, as far as I know. In http://sanderheinsalu.com/ajaveeb/?p=503, I wrote about incentives for authors not to submit careless papers (in the hope that a refereeing mistake gets them accepted). One such incentive is requiring refereeing for a journal as a precondition for submitting to that journal. If a submitted paper gets n referee reports on average, then before submitting, an author should referee n papers in a timely manner, which should balance the supply and demand of refereeing. This forced refereeing may lead to quick, but sloppy reports.

An additional incentive is needed for quality. Rahman’s 2010 paper on the question „who watches the watchmen” suggests an answer. The editor can insert a deliberate mistake in every paper and see whether a referee finds it. If not, then the refereeing of that person is likely of low quality. The mistake is corrected before publication. Alternatively, the editor can ask each author to insert a mistake and tell the editor about it. The author is not penalised for this mistake and is asked to correct it if the paper is accepted. The referees are again judged on whether they find the mistake.

The above scheme derives refereeing incentives from publication incentives, requiring minimal change to the current system. However, it is somewhat indirect. A more straightforward incentive for refereeing is to reward it directly, either paying for it or basing promotion decisions partly on it. The speed of refereeing is already slightly monetarily incentivised in the American Economic Journal: Microeconomics. If the referee sends the report before a deadline, then she or he is paid 100 dollars. If a good referee report takes about 10 hours, then the amount is certainly not enough to motivate quality provision, but it is a step in one of the right directions. A simple improvement on the binary „before vs after deadline” reward scheme is to reduce the payment gradually as the delay of the referee report increases.

If refereeing is incentivised, then lower-ranked journals need larger incentives to compensate for the fact that refereeing for these has less inherent prestige and the paper one has to read is of lower quality. On the other hand, lower-ranked journals are less able to motivate refereeing with the threat of not accepting submissions from those who have not refereed. There are more lower-ranked journals, and it is less important to get accepted by any particular one of them. Some of the less prestigious journals would find no referees under the system proposed above. This is good, because it removes the „peer reviewed” status of some junk journals and may force them to close. If authors know that quality journals require refereeing before submission, then they draw the obvious conclusion about a journal that does not require it.

Publication delay provides incentives

From submitting a paper to a journal until getting the first referee reports takes about six months in economics. It is very rare to get accepted on the first try. Most papers are rejected, and an immediate acceptance implies having submitted to too weak a journal. Waiting for the referee reports on the revision and second revision takes another six plus a few months. This seems unnecessary (reading a paper does not take six months) and inefficient (creates delay in disseminating research results), but is used for incentives.
Delay discourages frivolous submissions. It forces authors to evaluate their own work with some honesty. If the referee reports were immediate, then everyone would start at the top journal and work their way down through every venue of publication until getting accepted. This would create a large refereeing and editing burden. Delay is a cost for the authors, because simultaneous submissions to multiple journals are not allowed. Trying for high-ranking journals is a risk, because the author may not have anything to show at the next evaluation. This reduces submissions to top journals. It may be optimal to start at the middle of the ranking where the chances of acceptance are higher.
A similar incentive to submit to the correct quality level of journal can be created by imposing a submission fee, forbidding further submissions for a period of time if rejected or requiring the author to write referee reports on others’ papers. A submission fee should be distinguished from publication fees, which are used at fake journals. The submission fee is paid no matter whether the paper is accepted, therefore does not create the incentive for the journal to lower its standards and publish more papers.
The submission fee would impose different costs on authors in different financial circumstances. Some have research funds to pay the fee, some do not. Similarly, delay has a larger effect on people whose evaluation is coming sooner. Being banned from a journal for a given amount of time after a rejection is worse for a researcher working in a single field. Interdisciplinary folk have a wider variety of venues to publish in. Writing referee reports as a price of having one’s work evaluated may lead to sloppy reviewing. Any mechanism to induce self-selection has a cost. Yet self-selection is needed.

When to permit new construction

In places with zoning laws (restrictions on what kind of buildings are allowed at a given address), there is often debate on whether to relax the restrictions. This would allow new construction or enlargement of existing buildings. The renters are generally in favour of more buildings, because the increased supply of housing lowers prices at a given demand. The landlords oppose construction, because it reduces the rents they can charge. These economic arguments are already part of the debate.

Much lobbying effort (that costs time and money and may create corruption) could be avoided if the market price of housing (rents or house transactions) was used directly in the regulations. New construction is allowed if the average rent is above a cutoff and denied below. Zoning laws may be a bad thing overall, but if they are to remain, they could be made more resistant to manipulation by basing restrictions on objective indicators, not lobbying.

The good incentives created by this require interest groups to put their money where their mouth is: if landlords want to prevent new construction, they should lower the rents they charge. Only with average rents low would building be blocked. Similarly, if tenants want more housing, they should pay the landlords more. They may of course decide to pool their money and found a property development firm instead.

Property developers want to get construction permits for themselves, but deny them to other property developers (their competition). The motivation to get a permit by fair means or foul is stronger when property prices are higher. In this case, the above reliance on the market price to regulate permits does not create good incentives. If new housing is allowed when prices are high, developers are motivated to form a cartel and raise the price. Permits reward high prices. A good price-based regulation of property development would require the opposite of the rental market mechanism – a low selling price of new housing should lead to more construction permits.