Penalty Bidding Mechanisms for Allocating Resources and Overcoming Present Bias
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From skipped exercise classes to last-minute cancellation of dentist appointments, underutilization of reserved resources abounds, arising from uncertainty about the future and further exacerbated by present bias – the constant struggle between our current and future selves. The contingent second price mechanism proposed by Ma et al. 2019 provably optimizes utilization, but relies on the assumption that agents rationally optimize their expected utility, and fails to be incentive compatible when agents are present-biased. In this paper, we unite resource allocation and commitment devices through the design of contingent payment mechanisms. We propose the two-bid penalty-bidding mechanism, which assigns the resources to agents who are willing to accept the highest no-show penalties, determines a market-clearing penalty level, but allows each assigned agent to increase her own penalty in order to better counter her present bias. We prove the existence of a simple dominant strategy equilibrium, regardless of an agent's level of present bias or degree of "sophistication" (the ability to forecast the change in one's future preferences). Via simulations, we show that the proposed mechanism not only improves utilization, but also achieves higher social welfare than mechanisms that are welfare-optimal for settings without present bias.
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