## Shengwu Li

### Assistant Professor of Economics, Harvard University

### shengwu_li@fas.harvard.edu

I study economic theory and behavioral economics, with a particular focus on the design of market institutions.

## What's new?

Updated teaching slides on Simple Mechanisms, including the recent literature on obvious strategy-proofness. (May 5 2021)

New working paper: The Value of Excess Supply in Spatial Matching Markets (with Mohammad Akbarpour, Yeganeh Alimohammadi, and Amin Saberi)

The working paper on Investment Incentives in Near-Optimal Mechanisms has been improved and updated (March 15 2021).

## Working Papers

### The Value of Excess Supply in Spatial Matching Markets (with Mohammad Akbarpour, Yeganeh Alimohammadi, and Amin Saberi)

We study dynamic matching in a spatial setting. Drivers are distributed at random on some interval. Riders arrive in some (possibly adversarial) order at randomly drawn points. The platform observes the location of the drivers, and can match newly arrived riders immediately, or can wait for more riders to arrive. Unmatched riders incur a waiting cost c per period. The platform can match riders and drivers, irrevocably. The cost of matching a driver to a rider is equal to the distance between them. We quantify the value of slightly increasing supply. We prove that when there are (1 + ε) drivers per rider (for any ε > 0), the cost of matching returned by a simple greedy algorithm which pairs each arriving rider to the closest available driver is O(log3(n)), where n is the number of riders. On the other hand, with equal number of drivers and riders, even the ex post optimal matching does not have a cost less than Θ( n). Our results shed light on the important role of (small) excess supply in spatial matching markets.

We present a polynomial-time algorithm that determines, given some choice rule, whether there exists an obviously strategy-proof mechanism for that choice rule.

### Investment Incentives in Near-Optimal Mechanisms, (with Mohammad Akbarpour, Scott Kominers, and Paul Milgrom)

In a Vickrey auction, if one bidder has an option to invest to increase his value, the combined mechanism including investments is still fully optimal. In contrast, for any β < 1, we find that there exist monotone allocation rules that guarantee a fraction β of the allocative optimum in the worst case but such that the associated mechanism with investments by one bidder can lead to arbitrarily small fractions of the full optimum being achieved. We show that if a monotone allocation rule satisfies a new property called XBONE and guarantees a fraction β of the allocative optimum, then in the equilibrium of the threshold auction game with investments, at least a fraction β of the full optimum is achieved. We also establish generalizations and a characterization, and show that some well-known approximation algorithms satisfy the XBONE property.

## Publications

Consider an extensive-form mechanism, run by an auctioneer who communicates sequentially and privately with bidders. Suppose the auctioneer can deviate from the rules provided that no single bidder detects the deviation. A mechanism is *credible* if it is incentive-compatible for the auctioneer to follow the rules. We study the optimal auctions in which only winners pay, under symmetric independent private values. The first-price auction is the unique credible static mechanism. The ascending auction is the unique credible strategy-proof mechanism.

Akbarpour, Mohammad and Shengwu Li, Credible Auctions, *Econometrica*, Vol. 88, No. 2 (March, 2020), 425–467

Preprint (includes online appendices)

### Thickness and Information in Dynamic Matching Markets, Journal of Political Economy 2020, lead article (with Mohammad Akbarpour and Shayan Oveis-Gharan)

We introduce a simple model of dynamic matching in networked markets, where agents arrive and depart stochastically, and the composition of the trade network depends endogenously on the matching algorithm. Varying the timing properties of matching algorithms can substantially affect their performance, and this depends crucially on the information structure. More precisely, if the planner can identify agents who are about to depart, then waiting to thicken the market substantially reduces the fraction of unmatched agents. If the planner cannot identify such agents, then matching agents greedily is close-to-optimal. We specify conditions under which local algorithms that choose the right time to match agents, but do not exploit the global network structure, are close-to-optimal. Finally, we consider a setting where agents have private information about their departure times, and design a continuous-time dynamic mechanism to elicit this information.

Here are short videos that exposit the paper:

An agent makes consumption choices in multiple periods. Choice objects vary in type and quality; objects of the same type are inter-temporal substitutes. The current choice set is informative about the distribution over future choice sets. Thus, the presence of unchosen alternatives may rationally alter the agent's choice. Under some simple assumptions, the optimal policy exhibits context-dependent choice behavior, such as the decoy effect and choice overload.

### Belief Updating and the Demand for Information, Games and Economic Behavior 2018 (with Sandro Ambuehl)

How do individuals value noisy information that guides economic decisions? In our laboratory experiment, we find that individuals underreact to increasing the informativeness of a signal, thus undervalue high-quality information, and that they disproportionately prefer information that may yield certainty. Both biases appear to be mainly due to non-standard belief updating. We find that individuals differ consistently in their *responsiveness to information* – the extent that their beliefs move upon observing signals. Individual parameters of responsiveness to information have explanatory power in two distinct choice environments and are unrelated to proxies for mathematical aptitude.

A strategy is obviously dominant if, for any deviation, at any information set where both strategies first diverge, the best outcome under the deviation is no better than the worst outcome under the dominant strategy. A mechanism is obviously strategy-proof (OSP) if it has an equilibrium in obviously dominant strategies. This has a behavioral interpretation: a strategy is obviously dominant if and only if a cognitively limited agent can recognize it as weakly dominant. It also has a classical interpretation: a choice rule is OSP-implementable if and only if it can be carried out by a social planner under a particular regime of partial commitment.

I propose a new solution concept, obvious ex post (OXP) equilibrium. This is a formal standard of cognitive simplicity for mechanisms, in settings with interdependent values. Under some standard assumptions, the ascending auction has an efficient OXP equilibrium. I discuss a decision theoretic foundation for OXP mechanisms.

This paper examines the relationship between ethics and market design. It argues that market design should not rely wholly on preference utilitarianism in order to make ethical judgements. It exposits an alternative normative framework—informed neutrality between reasonable ethical positions.