Optimal Mechansim Design and Money Burning

TL;DR

This paper explores the design of mechanisms that use service degradation as a substitute for monetary payments to align incentives, aiming to maximize social surplus in computer systems where transfers are infeasible.

Contribution

It introduces a framework for designing and analyzing money-burning mechanisms that replace payments with service degradation to improve incentive alignment.

Findings

Framework for money-burning mechanism design

Maximizes residual social surplus

Addresses incentive issues without monetary transfers

Abstract

Mechanism design is now a standard tool in computer science for aligning the incentives of self-interested agents with the objectives of a system designer. There is, however, a fundamental disconnect between the traditional application domains of mechanism design (such as auctions) and those arising in computer science (such as networks): while monetary transfers (i.e., payments) are essential for most of the known positive results in mechanism design, they are undesirable or even technologically infeasible in many computer systems. Classical impossibility results imply that the reach of mechanisms without transfers is severely limited. Computer systems typically do have the ability to reduce service quality--routing systems can drop or delay traffic, scheduling protocols can delay the release of jobs, and computational payment schemes can require computational payments from users (e.g., in spam-fighting systems). Service degradation is tantamount to requiring that users burn money}, and such ``payments'' can be used to influence the preferences of the agents at a cost of degrading the social surplus. We develop a framework for the design and analysis of money-burning mechanisms to maximize the residual surplus--the total value of the chosen outcome minus the payments required.