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Name: Edward
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Birthday: 12/23/1939
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Interests: Writing
Explaining New Advances in Political Economy
Expertise: Public finance
Government Regulation
Incentive Compatible Mechanisms (Clarke Tax)
Occupation: Government
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| From : Nicolaus Tideman
Sent : Sunday, October 21, 2007 11:52 PM
To : info@kva.se
CC : edward clarke
Subject : Originality in Mechanism Design Theory
To the authors of the Prize Committee's review of Mechanism Design Theory:
It is helpful that the Prize Committee provided such an extensive review of mechanism design theory. And yet it is disappointing that the review repeats a common mistake with respect to attribution of originality in one of the important ideas in mechanism design theory.
You say (p. 7) "It thus came as a surprise when Edward Clarke (1971) and Theodore Groves (1973) showed that, if there are no income effects on the demand for public goods (technically, if the utility functions are quasi linear), then there exists a class of mechanisms in which (a) truthful revelation of one's willingness to pay is a dominant strategy, and (b) the equilibrium level of the public good maximizes the social surplus. [fn] Footnote: The basic intuition behind the Clarke-Groves mechanism was already present in Vickrey (1961). . . .”
The idea that it is possible to motivate people to report accurately the value that they would place on the provision of a public good was understood first by Edward Clarke and was published by him long before anyone else. As you say, Clarke first published his idea in Public Choice in 1971. He published a second use of the idea in Public Prices for Public Products (S. Mushkin, ed.) in 1972.
I believe that you will search in vain in Groves (1973) or in Groves's 1970 Berkeley dissertation for any indication that he had any inkling of the possibility of motivating people to report truthfully their preferences for public goods. His dissertation and his Econometrica paper were concerned strictly with incentives in teams. I believe that Groves did become aware, independently of Clarke, of the possibility of using a variation of his idea to motivate the reporting of truthful preferences about public goods. If I remember correctly, Groves told me that the possibility of adapting his idea to public goods came to his attention when a student of his, Martin Loeb, pointed out the possibility, and the two of them then coauthored a paper (1975) explaining the idea.
It can be debated whether an independent discovery published four years after an initial publication deserves joint credit for an idea. But if you wish to extend such credit to Groves you should cite not his 1973 paper, but rather the 1975 paper, and extend credit to Loeb as well as Groves.
As for Vickrey's contribution, it is true that his 1961 paper shows that it is possible to motivate participants in an auction to report their valuations of an auctioned item truthfully, and this can be understood as an example of the same principle that Clarke employed for public goods and Groves employed for incentives in teams. However, I am not aware of anyone using Vickrey's work to come to and understanding of other possible applications of the idea. Rather, as I understand it, Vickrey’s work was seen as an earlier example of the principle once its general possibilities were understood.
Another independent application of the same general idea was Richard Zeckhauser’s suggestion in his 1968 Harvard dissertation that efficient incentives with respect to accidents requires that all parties to an accident be charged the full cost of the accident. This idea can also be seen to be present, obliquely, in Coase’s 1960 paper.
The general principle linking all of these ideas is that the generation of efficient incentives requires that people be charged the full marginal social costs (or receive the full marginal social benefits) of their actions, whether these actions are bids in an auction, efforts to make a team more successful, actions that might result in accidents, or the reporting of valuations for a public good. When stated this way, the idea is so fundamental to economics that it is surprising that we were all so surprised by the novel applications of the idea. But we were. And this is the idea that is fundamental to mechanism design.
In my view, the expression of this fundamental idea in the context of motivating people to report their preferences for public goods truthfully, as demonstrated first by Clarke, was an important breakthrough that played a key role in helping economists to understand the general principles of mechanism design.
Sincerely,
Nicolaus Tideman
Professor of Economics
Virginia Tech
References:
Clarke, E.H. (1971). “Multipart pricing of public goods,” Public Choice 11, pp. 17-33.
Clarke, E.H. (1972). “Multipart pricing of public goods: An example,” pp. 125-30 in S. Mushkin (ed.), Public Prices for Public Products, The Urban Institute, Washington, 1972.
Coase R.H. (1960). “The Problem of Social Cost,” Journal of Law and Economics 3, pp. 1-44.
Groves T. (1970). “The Allocation of Resources under Uncertainty,” dissertation, University of California at Berkeley.
Groves, T. (1973). “Incentives in Teams,” Econometrica 41, pp. 617-31.
Groves, T. and Loeb, M. (1975). “Incentives and Public Inputs,” Journal of Public Economics 4, pp. 211-26.
Vickrey, W. (1961). “Counterspeculation, Auctions, and Competitive Sealed Tenders,” The Journal of Finance 16, pp. 8-37.
Zeckhauser R. (1968). “Studies in Interdependence,” dissertation, Harvard University.
| | |
| The decline and fall of the "perfect" voting scheme by CLARKE-TIDEMAN-TULLOCK
----------------------Warren D Smith Aug 2005--------------------------------
In principle,
the ultimate voting scheme would be ``honest utility voting'' in which each
voter
states the ``utility'' (measured in in some common, agreed-upon units)
of each possible candidate for him, and then the candidate with the greatest
utility (summed over all of society) is elected.
Unfortunately, honest utility voting seems unachievable in practice, since
(a) there are no common agreed-upon units, and (b) just one dishonest-strategic
voter,
by making some vast exaggeration, could control the election.
(However, in certain unusual scenarios, such as where the voters are not
dishonest humans, but rather honest \emph{robots}, and in which utility
\emph{is}
easily measured, this voting method would be best possible.)
Therefore (the common thinking before the 1970s was) honest utility voting is
a pipe dream -- an idealization of no practical interest.
However in the 1970s several people realized, some independently, that,
at least in a mathematical idealization of voters as rational economic
money-maximizing
animals, such a ``perfect'' voting system actually *is* achievable!!
In this post I shall recount that idea. Then I will explain why it actually
would not be the world's best voting system - it would be more like the world's
WORST
voting system!
The initial seminal idea (1961)
was due to W.Vickrey in a different context: auctioneering.
Imagine some moderate number of bidders (e.g. 10-20) want to buy some expensive
object.
Vickrey second-price auction protocol:
--------------------------------------
1. Each bidder privately estimates the true worth of the object, to him, in
dollars.
2. Each bidder submits that secret estimate, in a sealed envelope, as his bid.
3. All the envelopes are opened. The winner is the one who submitted the
greatest bid, *but* now he only *pays* the amount
specified by the *second*-highest bidder.
Vickrey argued that in this scenario, there is no strategic motivation for
bidders to
be dishonest in their bids, and plenty of motivation for them to be honest.
[Bid too high? Risk paying more than it is worth. Bid too low? Risk not
acquiring
the object at cost maximally below its true worth to you.]
This is an excellent way to run auctions and I have no intention of criticizing
it.
William Vickrey was awarded the 1996 Economics Nobel Prize. We now explain
the "perfect" voting scheme that follows from analogous thinking.
Clarke-Groves-Tideman-Tullock public choice protocol:
-----------------------------------------------------
1. Each voter as his (secret ballot) vote submits his private estimate of the
true worth
of each candidate (or election alternative) to him, in dollars.
2. The alternative (or candidate) with the greatest amount of money voted for
it/him,
wins.
3. We now re-examine all the votes, but now with the name of its voter-author
unveiled on each.
Suppose that vote ``made a difference,'' i.e. caused the election result to
differ from
what it would have been with that vote removed. Namely, suppose without
that vote, alternative B would have won by a money-margin Mb>0, but with it
alternative A wins by money-margin Ma>0. Then that voter now must pay a
*fee*
(the ``Clarke tax'') equal to Mb.
The Clarke-Groves-Tideman-Tullock central claim
is that there is no strategic motivation for voters to
be dishonest in their votes, and plenty of motivation for them to be honest.
[Bid too high? Risk paying more than the election result-change you caused,
actually was worth to you. Bid too low? Risk not acquiring
the election result you want, even though you could have done so at cost
maximally
below its true worth to you.]
This voting system therefore is ``perfect'' and always elects the best choice,
as
measured in (voter-perceived) dollars, for all of society. [Tideman and Tullock
felt obliged to point out that nevertheless their method ``would not cure
cancer.'' :]
Papers/books on this:
EH Clarke: Multipart pricing of public goods, Public Choice 11 (1971) 19-33
EH Clarke: Demand-revelation and the provision of public goods, Ballinger
Cambridge MA 1980
T Groves & M Loeb: Incentives and Public inputs, J of Public Economics 4 (1975)
211-226
T Groves & J Ledyard: Optimal allocation of public goods, a solution
to the free rider problem, Econometrica 45 (1977) 783-809
H Margolis: A note on demand-revealing, Pub Ch 40 (1983) 217-225
Jon C. Sonstelie & Paul R Portney: Truth or consequences: cost revelation
and regulation, J Policy Analysis & Management 2,2 (1983) 280-295
N Tideman & G Tullock: A new and superior process for making
public choices, J of Political Economy 84 (1976) 1145-1159
T.N. Tideman: An experiment in the demand-revealing process,
Public Choice 41 (1983) 387-401
W Vickrey: Counterspeculation, auctions, and competitive sealed tenders,
J Finance 16 (1961) 1-17.
What is wrong with it
---------------------
As far as I can tell, academic interest in this scheme simply died after 1984
for
no apparent reason. I thought of several things "wrong" with the "perfection"
of this scheme,
but I won't describe them here (and indeed some of my earlier criticisms were
erroneous).
Instead I will just cut directly to the
KILLER OBJECTION:
Suppose some voters collude. In fact, it will suffice just to consider the
simplest
possible collusion, between only *two* voters! (Call them "Nixon" and "Agnew.")
Nixon and Agnew, working as a team, both vote for alternative A saying it
is worth an ENORMOUS AMOUNT of money, say 999999999999999999999 dollars.
The more, the better.
Therefore, A wins. (This is more than all the money on the planet.)
But since Agnew's vote alone made it win, Nixon's vote did not change the
election
so Nixon is assessed *zero* fee. Similarly Agnew is assessed zero fee.
My point is that via such collusions 2-voter teams can make it *extremely*
unlikely that
they will be assessed any fee, even though they make it extremely likely they
and they alone
alter the election result. This leads to extreme dishonesty - so the whole idea
that in this system, everyone is motivated only to be honest, is revealed as
complete bunk.
It arguably would be true if collusions were impossible (although I have some
criticisms
even then, which are omitted since they pale in significance), but in reality,
it is
a bust, and such a huge bust that only 2 strategic voters can have complete
power
outweighing the entire rest of the world.
Sorry...
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| Auctions and Inefficiencies in Online Advertising
This is the best description to date on what is going on with Google, the Vickrey auction and the VCG mechanism in online advertising. See also following postings. | | |
| Study suggests search engine advertisers waste time, money
Published: January 17, 2006
------------------------------------------------------------
Many online advertisers are overpaying to have links to their business
on search engines like Google and Yahoo, according to a study released
Tuesday.
Researchers at Stanford Graduate School of Business say the auction
system used for placement of the ads result in some users overpaying and
others wasting time trying to figure out how to beat the system.
Google and Yahoo earn revenue by charging advertisers who participate in
the auctions each time a user clicks on that advertiser's site.
The advertisers purchase the right to have a link to their Web site
appear in strategic positions on pages that pop up when users conduct
keyword searches for terms associated with that buyer's business (such
as "car insurance," "travel," and so forth). They bid a specified amount
per click -- anywhere from a few cents to as much as $10, or even more.
Rather than paying the amount they've bid, however, in the current
auction system advertisers are charged only a penny more per click than
the next lowest bid, with some adjustments that depend on the quality of
the ad.
This encourages some advertisers to bid as much as they are willing to
pay for the ad, rather than simply what it is actually worth to them,
the study's authors say. Others spend too much time trying to figure out
how to underpay by keeping careful track where the continually adjusted
auction system places them.
The study authors suggest that if the auctions were structured
differently, they could be more beneficial to those who advertise.
Meanwhile, they recommend businesses only bid what they believe the ad
is truly worth to them.
"Bidders could get away from the auction for days and weeks at a time
and put their energy elsewhere," says Michael Ostrovsky, assistant
professor of economics at Stanford Business School.
Added -- March 29, 2006
This comment on Ostrovsky et. al. doubts that bidders would follow classic auction theory.
Blog: Bzst...
Post: Google's AdWords Auctions
Link:
Ads Auctions
| | |
| VCG and Internet Advertising
This is an update of a December entry. I can't make links work. Try the following to access the Stanford Business School paper #1917, entitled The "High Price of Internet Keyword Advertising" Or just google it with the title and Ostrovsky (author). The more academic papers are identified in the December entry below.
To quote an excellent summary of where Google may have gone wrong, I quote from the study below:
"Google and Yahoo earn revenues by charging advertisers who participate in auctions each time a user clicks on that advertiser’s site. What advertisers purchase is the right to have a link to their website appear in strategic positions on pages that pop up when users conduct keyword searches for terms associated with that buyer’s business (such as “car insurance,” “travel,” and so forth). What they bid is a specified amount per click—anywhere from a few cents to as much as $10, or even more.
Rather than paying the amount they’ve bid, however, in the current auction system advertisers are charged only a penny more per click than the next lowest bid, with some adjustments that depend on the quality of the ad. The search engines have billed this setup as one that should encourage auction participants to bid truthfully, since they ultimately pay less than what the click is worth to them. Ostrovsky says discerning bidders, however, see that underbidding is often still the wiser strategy. “It’s not a true Vickrey mechanism,” he says. This setup may result in volatility, he notes, with bids fluctuating from moment to moment as advertisers scramble to respond to one another. Such instability means that ad placements are often in flux as the search engine computers continually recalculate rankings.
In a true Vickrey auction, an advertiser would indeed be charged less than his actual bid, but the precise figure would be calculated differently. It would amount to the measure of the “externality”—or the value of lost clicks—he imposes on others by pushing them down in the ranking from, say, the number two to the number three slot. “For example,” says Ostrovsky, “suppose there were three advertisers truthfully bidding 10, 8, and 7 dollars per click, respectively, and three advertising slots, receiving 100, 70, and 50 clicks per hour. Then the presence of the first advertiser moves the second one from the top position to the next one, thus costing him 30 clicks per hour at $8 per click, and moves the third advertiser from the second position to the third one, costing him 20 clicks per hour at $7 per click. Hence, the total externality that the first advertiser imposes on others is $240 plus $140 equals $380 per hour, and he would be charged $3.80 per click in a Vickrey auction. Remarkably, under this pricing scheme, it is optimal for each advertiser to bid his actual value per click, regardless of what other advertisers do.”
In contrast, under the current auction system that is often not the case. In the above example, the first advertiser would be charged $8.01 per click, giving him 100 clicks per hour and leaving him with the profits of approximately $200. If, however, he reduced his bid from $10 to any value less than $7, he would be placed in the third position. He would receive only 50 clicks per hour, but would pay only a very minimal price, giving him much higher profits.
Hence, naive buyers who incorrectly assume they should bid exactly what they’re willing to pay end up paying more than they need to. More savvy advertisers, however, do strategically bid lower than true value. These “gamers,” says Ostrovsky, spend a significant amount of money on personnel and expensive software to calculate optimal bids that will secure specific positions on keyword search pages—and specific revenues from customer traffic. Moreover, advertisers are constrained to spend much more time at the gaming table to monitor competitors’ bids and respond to them. “Companies would be much better off using such resources to enhance their products, improve customer service, or what have you,” Ostrovsky argues." | | |
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