Approximately Efficient Resource Allocation: A Theoretical and Experimental Evaluation

Abstract

Matching mechanisms that elicit strength-of-preference can exhibit efficiency gains over those that do not. To quantify these gains, we propose a measure of approximate ex-ante Pareto efficiency. We use this notion to quantify the efficiency improvement of the Boston mechanism and the raffles mechanism (an extension of the Boston mechanism, which we define) over the random serial dictatorship mechanism (RSD) and deferred acceptance mechanism (DA). We complement our theoretical analyses with simulation and experimental results. The simulation results show that these gains also hold for utilitarian welfare in certain parameter regimes. The experimental results focus on the raffles and DA mechanisms. Using human subjects, we find that the raffles mechanism yields higher average payoffs as predicted by the theory, despite the fact that subjects play only approximately optimal strategies.

Keywords: random assignment, cardinal utility, raffles, approximate Pareto efficiency, price of anarchy, experimental economics

JEL Classification: D47, D61, C78, D82, C62, C68