Allocating Uncertain and Unresponsive Resources: An Experimental Approach

Jeffrey Banks, John Ledyard and David P. Porter

RAND Journal of Economics, 1989, vol. 20, issue 1, 1-25

Abstract: We identify an important class of economic problems that arise naturally in several applications: the allocation of multiple resources when there are uncertainties in demand or supply, unresponsive supplies (no inventories and fixed capacities), and significant demand indivisibilities (rigidities). Examples of such problems include: scheduling job shops, airports, or supercomputers; zero-inventory planning; and the allocation and pricing of NASA's planned Space Station. Using experimental methods, we show that the two most common organizations used to deal with this problem, markets and administrative procedures, can perform at very low efficiencies (60-65% efficiency in a seemingly robust example). Thus, there is a need to design new mechanisms that more efficiently allocate resources in these environments. We develop and analyze two mechanisms that arise naturally from auctions used to allocate single-dimensional goods. These new mechanisms involve computer-assisted coordination made possible by the existence of networked computers. Both mechanisms significantly improve on the performance of administrative and market procedures.

Date: 1989
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