Giordani's Yerkciv Auction – (Vickrey, but backwards)

One of the privileges of blogging is that when you write something that’s just plain wrong,  somebody will come along and set you straight quite quickly. So I’m retracting my last post of the night – sorry about that.

One final wrinkle to add on SICADay.

In Finance Minister Giordani’s presentation, the auction design he’s proposing is a “modified” form of Vickrey auction. Let’s unpack this.

A Vickrey auction is a sealed-bid auction where the highest bidder wins, but pays the amount offered in the second-highest bid. In this design, it always makes sense for you to be truthful about how much you want the good being auctioned, safe in the knowledge that if you win, the price you actually pay will be lower than your bid.

Giordani’s design has multiple winners in each auction, and so he introduces a seemingly benign innovation: the price they all have to pay is the average of the winning bids.

So let’s say Giordani holds a dollar auction and gets four bids: one guy offers Bs.10 for a dollar, the others offer Bs.12, Bs.14, and Bs.16. The top three bidders “win” the auction, and the price each has to pay is the average of their three bids – in this case, Bs.14.

Notice the problem?

Yup, there’s some shlub who offered Bs.12, did all his paperwork on the basis of a Bs.12 dollar, negotiated a deal with his foreign supplier on the basis of a Bs.12 dollar…and now has to pay 14 bolos for each dollar he buys!

The problem isn’t just that that one guy’s letter-of-credit request is now gobbledygook.

It goes way deeper: when you put in your bid in a Yerkciv Auction, you can’t know if the price you’ll eventually be expected to pay is lower or higher than your bid. This undoes the Vickrey Auction’s central attraction: giving you the peace of mind to bid truthfully. Suddenly, bidding is a high stakes gamble, and bidding truthfully isn’t necessarily the best strategy – indeed, bidding truthfully may end up saddling you with a legal obligation to purchase dollars at a price you can’t afford!

What we have here, in other words, is a Madurified Vickrey, an auction design that doesn’t actually preserve any of virtues that made the Vickrey Auction famous, and instead hijacks the guy’s name for credibility. Not that we’ve ever seen Maduro try that before.

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