Public defence in Economics, M.Sc (Econ.) Mikael Mäkimattila
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Title of the thesis: Designing market institutions
Doctoral student: Mikael Mäkimattila
Opponent: Prof. Jan Knoepfle, Queen Mary University of London
Custos: Prof. Matti Liski, Aalto University School of Business, Department of Economics
Markets allocate a wide range of goods and services, from jobs and university admissions to permits to emit carbon or access to health care. The rules and organization of a market shape its outcomes: who gets what and at what price.
This thesis consists of three essays on the design of such rules, or market institutions. Each essay studies a different design problem, but all of them emphasize two central design challenges. The first is misaligned incentives: market participants pursue objectives that may differ from those of the designer. The second is private information: the designer typically lacks information relevant for design, and some valuable information is held privately by market participants.
The first essay studies profit-maximizing certification. The certifier in the model can represent, for example, an educational testing agency, a credit rating agency, or a quality certifier. The essay characterizes how such a certifier should design and price certificates. One key insight is that a profit-maximizing certifier may limit the amount of information generated in order to capture more of the value of certification as profit.
The second essay studies the regulation of a firm with market power when the regulator also cares about how surplus is distributed across market participants. Such situations arise, for example, in health care markets. The essay shows that optimal regulation combines two policies commonly used in practice. One requires the firm to offer an affordable basic-quality good while allowing pricing flexibility for premium options. The other requires the firm to price each option at cost plus a fixed fee.
The third essay investigates how the pricing of environmental damages should be affected by distributional concerns. The essay shows that distributional concerns shape optimal policy, but not necessarily in obvious ways. For example, the theoretical analysis, together with an empirical application, can justify electric vehicle subsidies that increase with income.
Together, the essays help explain why certain market arrangements are common in practice and offer perspectives on the design of policy and regulation.
Key words: microeconomics, information economics, mechanism design
Thesis available for public display 10 days prior to the defence at: https://aaltodoc.aalto.fi/doc_public/eonly/riiputus/