One man, one bid

Publication Type:
Journal Article
Games and Economic Behavior, 2017, 101 pp. 151 - 171
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© 2016 Elsevier Inc. We compare two mechanisms to implement a simple binary choice, e.g. adopt one of two proposals. We show that when neither alternative is ex ante preferred, simple majority voting cannot implement the first best outcome. We introduce a simple bidding mechanism where votes can be bought at a quadratic cost and voters receive rebates equal to the average of others' payments. This mechanism is budget-balanced, individually rational, and fully efficient in the limit. Moreover, the mechanism redistributes from those that gain from the outcome to those that lose and everyone is better off under bidding compared to voting. We test the two mechanisms in the lab using an environment with “moderate” and “extremist” voters. The observed efficiency losses under voting are close to theoretical predictions and significantly larger than under bidding. Because of redistribution, the efficiency gain from bidding benefits mostly the moderate voters.
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