Incentive auctions for water rights

 Here's a press release from Auctionomics, the consulting firm run by Paul Milgrom and his business partner Silvia Console Battilana. They propose to repurpose water rights in a way that may resemble the recent incentive auctions for repurposing radio spectrum.

From Lawsuits to Solutions: Auctionomics Is Harnessing Efficient Market Design and Deep Tech for a Litigation-Free Solution to the Water Crisis by Auctionomics 

"Earlier this year, Paul co-hosted a conference at Stanford University attended by a group of economists, lawyers, and water experts. The group developed a proposal for a novel policy to fix the Colorado River crisis: the U.S. should redefine and buy back existing water rights, just as it did for misallocated rights to radio airwaves.

Auctionomics led the development of the FCC's Broadband Incentive Auction, converting TV licenses to new valuable uses. The current issues with water rights are similar to those of the radio spectrum, where existing rights holders with solid legal standing were hesitant to change the status quo, despite the clear misallocation of resources.

However, Auctionomics successfully addressed the problem with its innovative auction design, facilitating next-generation telecommunications and raising $19.8 billion while safeguarding existing broadcasters.

The Colorado River proposal aims to address deficiencies in the current water rights allocation system. The existing system hinders mutually beneficial trades between users and prohibits water banking - a means to enable farmers or cities manage current water use more efficiently, leaving more in reservoirs for future dry periods.

While there are historical reasons for these limitations - the uses of river water are diverse, interconnected, and poorly measured. Modifying them can result in severe consequences in a system that guarantees inefficiency and overconsumption. However, the same model employed to redistribute broadband spectrum can incentivize water rights holders to use their water more efficiently.

Auctionomics aims to adapt this model to the Colorado River with practical steps involving a hydrological survey, voluntary redefinition of water rights, and purchasing enough new rights from willing sellers to meet the necessary reductions in total consumption."

School choice consulting in New York City

 It is a truth universally acknowledged that any stressful process in which affluent people participate must be in need of a consulting industry.

New York City's school choice processes are no exception:

The School-Admissions Whisperer Joyce Szuflita can assuage Brooklyn’s most anxious parents.  By Caitlin Moscatello

"For the better part of two decades, Szuflita has demystified the process of public-school admissions for some of Brooklyn’s most overwhelmed, optimization-prone parents. ... Prekindergarten and elementary admission are largely based on where you live. But the game gets significantly more byzantine come middle school and more complex yet for high school, with its tier of “screened” institutions that have traditionally required students to test in, audition, or undergo other high-stress assessments. The process of getting into certain schools — and don’t kid yourself, everybody wants in — has long been a brutal one. Until it got slightly easier. And then brutal again. Or maybe some middle level of brutal? This is why parents need Szuflita.

...

"On September 29, schools chancellor David C. Banks abruptly announced that some of the city’s most prestigious middle and high schools would move away from an open lottery system and increase their use of merit-based admissions. The approach prioritizes students with an A average — children Banks calls “hardworking,” a loaded description in a city with one of the greatest wealth disparities in the country — and reverses the previous mayor’s strategy, which aimed to usher more lower-income students into New York’s top schools.

...

“The pendulum is swinging back a little bit,” Szuflita says of the Banks announcement, insisting that the changes are not as sweeping as they might seem. “The algorithm is still exactly the same.” Contrary to how some have read the news, the old lottery is still partially in use. The random number (a hexadecimal, actually) that each student is assigned works as a tiebreaker to get into screened high schools and can sometimes be a major factor when families submit their ranked choices of preferred schools.

"Clients often panic about their lottery numbers and want to change the ranking of their list, which Szuflita doesn’t recommend for anyone except those with exceptionally high or low numbers. Trying to outsmart the process, she says, is pure “magical thinking.” She’s constantly telling parents to trust the fairness of the city’s sorting algorithm, whose authors literally won the Nobel Prize, and rank in true preference order. (Or, as she tends to put it in emails: “RANK IN TRUE PREFERENCE ORDER!!!!!!!”) Despite this, clients sometimes persist, asking, How do we work the algorithm to our advantage? How do we strategize ranking our list? “That’s when I yell at people in the nicest way,” she says, because they don’t know what they’re talking about and they’re cutting into her time. “Like, ‘No, shut up. Shut up and listen to me. You’re not going to get everything you need to know.’” But most of her consults take two hours, she says, and don’t involve a lot of back-and-forth. “They tell me about their children and then what follows is usually a rapid-fire, two-hour information dump from me. There is not a lot of airing of concerns, because I already anticipate their concerns.” The download is intensely specific, tailored to each family and covering individual schools, principals, teachers, and facility upgrades few people are aware of. She verifies rumors (or sets the record straight) and knows things you can’t find on the internet."

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Related recent post:

Sunday, October 2, 2022

Return to previous school assignment policies (in some respects) under New York City's new mayor

Unraveling for consulting: recruiting for next summer has begun.

 Here's a (gated) story from Business Insider, saying that big consulting firms have already started recruiting college juniors for Summer 2022 internships.  The article points out that investment banks are already recruiting very early too, and suggest that this is the consulting firms' reaction.

Deadlines for summer 2022 internships at Big 3 giants like McKinsey, Bain, and BCG are already whizzing by. Here's why they've kicked off recruiting earlier than ever. Reed Alexander and Samantha Stokes 

 

 

Blockchains, smart contracts, and incomplete contracts (and Prysm Group, a startup consulting firm on all that)

There's a lot of talk lately about smart contracts, i.e. contracts written in executable code, but less talk about how all contracts are incomplete (and therefore subject to renegotiation, dispute resolution and issues of residual control), a subject for which Oliver Hart won a recent Nobel.

So I was glad to see this article in Forbes:

Nobel Prize Winner Joins Blockchain Startup To Fix Smart Contracts
by Michael del Castillo

"Long before blockchain was cool, Nobel Prize-winning economist Oliver Hart was into contracts. As far back as 1976, the doctor of economics from Princeton University had been exploring how corporations use contracts to interact, and what happens when things go wrong."

The article is sparked by the fact that Oliver and Preston McAfee, who recently retired from being Chief Economist at Microsoft, have become advisors to a startup consulting company called Prysm Group, which aims to advise blockchain companies about contracts, incentives, and economics generally.

Here's the press release:

Prysm Group Adds Nobel Prize-Winning Economist And Former Microsoft Chief Economist To Board Of Senior Advisors

"Prysm Group provides blockchain organizations with counsel in the complex economic fields of contract theory, market design, game theory, and social choice."

The founders of Prysm Group are two economists who I met when they were graduate students at Harvard, Cathy Barrera and Stephanie Hurder (who I've blogged about before, here, and here).

Paul Milgrom on spectrum auctions in India and Germany

Paul Milgrom writes on Success in Spectrum Auctions in India and Germany, in which he played an active role consulting to bidders.

Sentenced to prison? Hire a consultant.

The NY Times reports (in the Sports section) that
Consultants Are Providing High-Profile Inmates a Game Plan for Coping

"The former Giants wide receiver Plaxico Burress, who is serving a two-year sentence for a weapons charge, recently joined a growing list of high-profile inmates who have hired prison consultants to help them navigate their entry to a confined life. Others have included Bernard L. Madoff, Michael Vick, Mike Tyson, Martha Stewart and Leona Helmsley."

Market design from the other side of the fence

Market design is both about designing markets (design as a verb) and about understanding the design of existing markets (design as a noun). This latter activity is the way game theorists originally got into the business; by looking at the existing 'rules of the game,' and figuring out how they worked, and could be made to work.

I'm reminded of this by two working papers on auctions, one focused on offering consulting advice to a bidder, and the other on criminal collusion among bidders.

The consulting story is by the A-team of spectrum auction consultants, and recounts some of their recent experience giving bidding advice: Winning Play in Spectrum Auctions by Jeremy Bulow, Jonathan Levin and Paul Milgrom. They focus on the information flows in multi-round auctions, and how the amounts bid in early rounds can help forecast final prices, which is an aid in deciding on which lots to bid:

"In major spectrum auctions, even large corporations need to raise or put aside money in advance to finance their spectrum purchases. Many of these companies also have a broad set of target licenses. If these licenses are substitutes and the budget constraint is binding, the bidder's optimal purchase will involve spending its whole budget or nearly so. Of course not every bidder falls into this category. For bidders with tight budgets and narrow interests, or for entrants with all-or-nothing goals, rising prices could lead them to spend zero once the prices of target licenses rise too high.

"If bidders in the first category account for enough of the money in the auction, a previously unexplored pattern becomes identifiable in the data. Define a bidder's exposure to be the sum of all of its bids in a given round, including its standing high bids from the prior round and all of its new bids in the current round, whether provisionally winning or not. This is the largest amount that a bidder might have to pay if all of its bids were to become winning. If a bidder faces a binding budget constraint and has broad interests, then as prices increase from round to round, its total exposure will eventually level off at an amount approximating its budget. If all bidders were to fall in this category, then the total exposure of all bidders in the auction would rise to the level of the aggregate bidder budgets and level off, forecasting the final auction prices. As prices rise, bidders will narrow the set of licenses on which they bid, the identities of the provisionally winning bidders on various licenses will change, and total winning bids will continue to rise, but final total winning bids will be forecast early and well by total exposure."

The account of criminal collusion is John Asker's A Study of the Internal Organisation of a Bidding Cartel, which tells of a long lived cartel of stamp dealers who agreed in advance which of their members would bid on each lot that they were collectively interested in. (He obtained the data from the prosecution records of the Antitrust Bureau of the New York Attorney General’s Department.) They coordinated among themselves by first holding a "knockout auction" (of roughly the kind that Graham, Marshall, and Richard 1990 described among bidders in New Jersey machine tool auctions), to determine which of the cartel members would be allocated the right to bid on each lot, and what sidepayments would be made following a successful bid. The detailed data allow Asker to estimate the costs that the cartel imposed on sellers and on other bidders who were not members of the cartel.