Long Term Partnership for Achieving Efficient Capacity Allocation

35 Pages Posted: 2 Nov 2014 Last revised: 29 Aug 2017

See all articles by Nataliya Kuribko

Nataliya Kuribko

Keystone Foundation

Tracy Lewis

Duke University

Fang Liu

University of Chinese Academy of Sciences; Chinese Academy of Sciences

Jing-Sheng Jeannette Song

Duke University - Fuqua School of Business

Date Written: August 26, 2017

Abstract

We consider a capacity provider and a group of independent buyers who partner to share a scarce but expensive-to-build capacity over a finite horizon under privately informed demand conditions. At the beginning of the time horizon, the capacity provider must invest in building capacity; all members may invest in increasing their own and possibly other members' market sizes. Then each member observe and update their private, history-dependent demand information over time. Because the value of the capacity to each member is highly uncertain when investment is made, achieving the first best outcome while sustaining under a dynamic environment is challenging for the partnership. We address this issue by proposing a multi-period membership-type agreement (hereafter referred to as the Agreement) as a series of single-period contracts with flexible terms that are renegotiated each period. The Agreement enforces ex-post efficient capacity allocation and ex-ante efficient investment. The set of inter-partner transfers in the Agreement makes each member the residual claimant to the surplus it creates and hence induces truthful demand reports. This contract is also budget-balanced and voluntary. In doing so, we develop a new solution concept for dynamic collective action mechanisms.

Keywords: Mechanism Design; Capacity Allocation; Investment; Implementation

Suggested Citation

Kuribko, Nataliya and Lewis, Tracy and Liu, Fang and Song, Jing-Sheng Jeannette, Long Term Partnership for Achieving Efficient Capacity Allocation (August 26, 2017). Duke I&E Research Paper No. 16-1, Available at SSRN: https://ssrn.com/abstract=2518046 or http://dx.doi.org/10.2139/ssrn.2518046

Nataliya Kuribko

Keystone Foundation ( email )

Keystone Centre, PB 35
Groves Hill Road
Kotagiri
India

Tracy Lewis

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

Fang Liu (Contact Author)

University of Chinese Academy of Sciences ( email )

No.80, Zhongguancun East Road, Haidian District
Beijing
China
15311858853 (Phone)

Chinese Academy of Sciences ( email )

Zhongguancundonglu
55
Beijing, 100190
China
+8615311858853 (Phone)

Jing-Sheng Jeannette Song

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Duke University
Durham, NC 27708
United States

HOME PAGE: http://people.duke.edu/~jssong/

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