Auction theory and mechanism design

Many public-works contracts are awarded via auctions where bidders compete in multiple dimensions of performances. He developed a theory of scoring-rule auctions to model such situations. In a scoring-rule auction, bidders propose multi-attribute bids say quality ${\displaystyle q}$ and price ${\displaystyle p}$, and the auctioneer (procurer) uses a scoring function ${\displaystyle s(q,p)}$ to evaluate the bid, and awards a contract to the bidder whose proposal score is the highest. His paper^[8] shows that the optimal outcome can be implemented using a scoring function that downplays quality relative to price to intensify price competition. His second-score format anticipates the practice of adjusting payments based on advertiser’s click-through rates commonly used in the Internet ad auctions.

He wrote a series of papers with Ian Gale on the role of budget constraints in auctions and auctions design. They show that bidders differing in budgets act fundamentally differently from bidders differing in their valuations of goods, leading to important implications for efficiency and revenue. The well-known revenue equivalence theorem fails for instance.^[9]

Contract theory

Many key institutions such as property rights, authority, decision rights, and communication channels are difficult to explain in light of the Coase theorem: parties can simply bargain to agree on an efficient action and enforce that agreement through a contract. To explain those institutions, one thus need to explain why such a contractual approach is not possible or too costly to work. The incomplete contracts paradigm pioneered by Sanford J. Grossman, Oliver D. Hart, and John H. Moore argues that contracts are often incomplete and unable to provide adequate incentives for crucial relationship-specific investments needed for transactions, thus rationalizing organizational intervention such as ownership rights and authority, etc. His paper with Don Hausch ^[10] provides a rigorous foundation (see Segal 1999^[11] and Hart and Moore 1999^[12] for alternative foundation) for this paradigm, identifying investment externalities ("cooperativeness") and renegotiability of contracts in the face of mutually beneficial ex post gains as two conditions rationalizing organizational interventions.

Matching theory

His research studied the matching markets particularly in the context of assignment of students to public schools, particularly focusing on the stability and fairness of the assignment outcome as well as the incentives of market participants. His works show a large market size helps to achieve a stable outcome^[13] and to resolve tradeoffs between efficiency on one side of the market (e.g., students) and the fairness.^[14] His pioneering work on college admissions shows how colleges' strategic behavior in the decentralized admission system can lead to an inefficient and unfair outcome.^[15]