Pay-as-You-Go Resource Auctions

33 Pages Posted: 23 Aug 2006

See all articles by Mathias Hild

Mathias Hild

University of Virginia - Darden School of Business

Date Written: August 7, 2006

Abstract

Under the Vickrey-Clarke-Groves (VCG) mechanism, the divisions of a corporation are asked to report profit projections for each feasible allocation of corporate resources. Based on these reports, headquarters determine an efficient allocation and distribute side payments to the divisions that reward truthful revelation of the divisions' private information. Both the required reports and headquarters' optimization problem grow rapidly in complexity with the number of heterogeneous resources to be allocated. This paper discusses two designs that aim to reduce the complexity of both the divisions' reporting tasks and headquarters' optimization task through an iterative and distributed procedure. The designs apply to resources that affect only their recipient (private goods) as well as to resources that create positive or negative externalities for other divisions (public goods). The designs allow divisions to subsidize or penalize the consumption of public goods by other divisions and uses a differential, pay-as-you-go pricing rule to reward truthful revelation of private information. The VCG mechanism thus implemented holds some promise as a practically viable allocation process for corporate resources.

Keywords: resource allocation, Vickrey-Clarke-Groves mechanism, mechanism design, game theory, transfer prices

Suggested Citation

Hild, Mathias, Pay-as-You-Go Resource Auctions (August 7, 2006). Darden Business School Working Paper No. 07-04, Available at SSRN: https://ssrn.com/abstract=926088 or http://dx.doi.org/10.2139/ssrn.926088

Mathias Hild (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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