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2025 Economic Theory Festival

The fifth iteration of the Economic Theory Festival will be held 10-11 December at the University of Queensland, with Erik Eyster (UCSB) as the main speaker. It will be followed by the APIOC 2025 conference. Support from the School of Economics at UNSW, the School of Economics at UQ, and the Australian Research Council is, as always, gratefully acknowledged. 

Working Papers and Work in Progress

• "Pay-as-Bid Auctions with Budget Constrained Bidders", with G V A Dharanan. New version September 2025.

Download: PaBA-2025-09

Abstract   We investigate the equilibrium equivalence between pay-as-bid auctions and first-price auctions when bidders may be budget-constrained. This equivalence requires additional conditions which translate to the global concavity of the bidder’s expected payoff function. We show that, when these conditions are present, the symmetric equilibrium strategies in the pay-as-bid auction are a modification of the equilibrium strategies in Che and Gale’s (1998) first-price auction under budget constraints. Our analysis captures a new economic trade-off for a budget-constrained bidder that only appears in multi-unit auctions and has no analogue in single-unit auctions. We also show that our conditions collapse in a sufficiently large market. In at least one instance, the equilibrium equivalence fails with three or more bidders. Therefore, despite its theoretical appeal, the equilibrium link between pay-as-bid auctions and first-price auctions is fragile.

• "Evaluating the Performance of Approximation Mechanisms under Budget Constraints", with Ahuva Mu'alem. New version coming soon.

Abstract    We study revenue maximization in a buyer-seller setting where the seller has a single object and the buyer has both a private valuation and a private budget. The presence of private budgets complicates the classic single-product monopoly problem, making optimal mechanisms difficult to analyze and highly sensitive to distributional details. To overcome this, we evaluate the robust performance of approximation mechanisms relative to optimal mechanisms. We work two measures of performance: the guaranteed fraction of optimal revenue (GFOR) for restricted classes of mechanisms, and the maximal value of relaxation (MVR) for relaxed classes. Our analysis reveals sharp contrasts. On the positive side, we show that for distributions with bounded support, simple mechanisms with poly-logarithmic menu size can approximate optimal revenue arbitrarily well, regardless of correlation between valuations and budgets. On the negative side, we establish strong impossibility results: for distributions with unbounded support, or even bounded support concentrated in the unit square, no simple mechanism —or indeed any mechanism with a finite or sublinear menu— can guarantee a positive fraction of the optimal revenue. We also demonstrate unbounded revenue gains from certain relaxations when valuations and budgets are negatively correlated, and highlight cases of revenue non-monotonicity . Taken together, our results underscore the fragility of approximation approaches in the presence of private budgets: except for a narrow set of conditions, approximation mechanisms incur large revenue losses, pointing to fundamental limits of simplicity and robustness in mechanism design..

• "Optimal Mechanisms with Ex-Post Budget Constraints", with Ahuva Mu'alem. Preliminar version - August 2023.

Download: Optimal-Mech-Budgets

Abstract   We study revenue maximizing mechanisms where the seller has one or two objects to sell and the buyer has public valuations and private budgets. We consider ex-post participation and ex-post budget feasibility constraints to analyze the impact of financial restrictions on the formulation and properties of revenue maximizing mechanisms. 

• "Demand Landscaping: Dynamic Monopoly with Malleable Preferences", with Steve Callander and Arghya Ghosh. New version coming soon (hopefully).

Abstract  Traditional IO models take consumer demand as given and explore ways in which firms exploit non-competitive market features to increase profits. Recently, research in psychology, marketing and behavioral economics points to a causal loop between preferences and behavior: consumer preferences influence current choices, which in turn feedbacks into future preferences.  The malleability of consumer preferences raises the possibility that a firm engages in demand landscaping, taking product positioning and pricing decisions today to influence the shape of its future demand. We incorporate this feature into an otherwise canonical spatial product differentiation model. In our model, a firm operates through time in a Hotelling market where consumers update their ideal points based on past behavior. This simple mechanism provides the firm with additional market power. Depending on the initial configuration, the firm either starts as a dominant presence, capturing a large segment of the market, or goes from a niche to a mass market through time. In both scenarios, the firm is able to accumulate market power over time. These two predictions are consistent with stylized facts: sometimes a firm establishes a dominant presence early on and maintains it through the years; other times, a firm starts with a niche market and grows its market share steadily. Our model further suggests that firms can increase market power over time and amass supra normal profits without necessarily increasing market penetration. 

• "Policy Persistence and Economic Reform".  April 2018. 

Download: Persistence-Reform

Abstract  This paper examines the impact of adjustment costs (e.g., frictions on labor markets) on the implementation of market-oriented reform programs. A policy-maker can introduce efficiency enhancing policy changes to increase the rate of economic growth by inducing, via monetary compensations, reassignments of a scarce resource from low to high productivity agents. Without adjustment costs, productivity gains are sufficiently large to permit the implementation of pure market mechanisms. With adjustment costs, the government is required to increase compensation to all productivity agents to induce them to adopt any policy change. Since adjustment costs interact with incentives, introducing a full market mechanism creates too onerous financial burden in the economy. I show that, under some mild assumptions, the trade-offs between short-term efficiency gains and long term welfare maximization are resolved by a transition program that exhibits some policy persistence. In a transition policy, persistence is concentrated on intermediate productivity agents for whom the interaction of adjustment costs and individual incentives is most perverse. I characterize the optimal dynamic policy changes and show that persistence is "a feature, not a bug" of the optimal economic reform program.

• "Inconspicuous Conspicuous Consumption", with Hongyi Li and Jonathan Hall. May 2016. 

Download: Bling

Abstract    A puzzling feature of conspicuous consumption, given its signaling role, is that it is not more conspicuous. For example, luxury goods often feature subtle, difficult-to-recognize branding. We analyze a model where consumers care about their reputation for wealth and social capital. In equilibrium, wealthy but poorly-connected consumers choose loud status goods, while wealthy, well-connected consumers choose subtle status goods to separate from poorly-connected consumers. The model thus explains why “old-money” types consume subtly, whereas “nouveau-riche” types consume loudly. It also addresses the stylized fact that subtly-branded status goods tend to be pricier than their loudly-branded equivalents.