Penalty Bidding Mechanisms for Allocating Resources and Overcoming Present Bias

TL;DR

This paper introduces a penalty bidding mechanism that incentivizes resource utilization by allowing participants to bid on penalties, effectively countering present bias and improving efficiency, welfare, and equity in resource allocation.

Contribution

It proposes a novel two-bid penalty-bidding mechanism that extends prior work, providing a simple dominant strategy equilibrium applicable regardless of present bias levels.

Findings

Mechanism significantly improves resource utilization.

Achieves higher welfare compared to existing mechanisms.

Enhances equity in resource allocation.

Abstract

From skipped exercise classes to last-minute cancellation of dentist appointments, underutilization of reserved resources abounds. Likely reasons include uncertainty about the future, further exacerbated by present bias. In this paper, we unite resource allocation and commitment devices through the design of contingent payment mechanisms, and propose the two-bid penalty-bidding mechanism. This extends an earlier mechanism proposed by Ma et al. (2019), assigning the resources based on willingness to accept a no-show penalty, while also allowing each participant to increase her own penalty in order to counter present bias. We establish a simple dominant strategy equilibrium, regardless of an agent's level of present bias or degree of "sophistication". Via simulations, we show that the proposed mechanism substantially improves utilization and achieves higher welfare and better equity in comparison with mechanisms used in practice and mechanisms that optimize welfare in the absence of present bias.