Working Papers

The Financial System




Auctions with Ethical Concerns

Author:Hitoshi Matsushima


We investigate the implementation of social choice rules (SCRs) in dominant strategy, where the central planner evaluates social welfare ethically rather than financially by excluding monetary transfers from the welfare evaluation, prohibiting redistribution, and putting heterogenous welfare weights on agents’ willingness to pay in a state-contingent manner. With such ethical concerns in mind, we show that sidepayment devices play a significant role in incentivizing agents to be honest. Focusing on multiunit auctions with a single-unit demand, we consider the case in which the central planner faces a situation where multiple conflicting ethical criteria with their own advantages coexist and cannot be aggregated into a single criterion. We demonstrate a new side-payment rule design that successfully implements reasonable SCRs induced by the method of procedure explored by Matsushima (2021). We clarify when and how to use subsidies and set-asides as incentive and fairness devices, depending on the state.