In
mechanism design
Mechanism design is a field in economics and game theory that takes an objectives-first approach to designing economic mechanisms or incentives, toward desired objectives, in strategic settings, where players act rationally. Because it starts a ...
, a branch of
economics, a weakly-budget-balanced (WBB) mechanism is a mechanism in which the total payment made by the participants is 0. This means that the mechanism operator does not incur a
deficit, i.e., does not have to subsidize the market. Weak budget balance is considered a necessary requirement for the economic feasibility of a mechanism. A strongly-budget-balanced (SBB) mechanism is a mechanism in which the total payment made by the participants is ''exactly'' 0. This means that all payments are made among the participants - the mechanism has neither a deficit nor a
surplus. The term budget-balanced mechanism is sometimes used as a shorthand for WBB, and sometimes as a shorthand for SBB.
Weak budget balance
A simple example of a WBB mechanism is the
Vickrey auction
A Vickrey auction or sealed-bid second-price auction (SBSPA) is a type of sealed-bid auction. Bidders submit written bids without knowing the bid of the other people in the auction. The highest bidder wins but the price paid is the second-highest ...
, in which the operator wants to sell an object to one of ''n'' potential buyers. Each potential buyer bids a value, the highest bidder wins an object and pays the second-highest bid. As all bids are positive, the total payment is trivially positive too.
As an example of a non-WBB mechanism, consider its extension to a
bilateral trade
Bilateral trade or clearing trade is trade exclusively between two states, particularly, barter trade based on bilateral deals between governments, and without using hard currency for payment. Bilateral trade agreements often aim to keep trade de ...
setting. Here, there is a buyer and a seller; the buyer has a value of ''b'' and the seller has a cost of ''s''. Trade should occur if and only if ''b'' > ''s''. The only
truthful mechanism In game theory, an asymmetric game where players have private information is said to be strategy-proof or strategyproof (SP) if it is a weakly-dominant strategy for every player to reveal his/her private information, i.e. given no information about ...
that implements this solution must charge a trading buyer the cost ''s'' and pay a trading seller the value ''b''; but since ''b'' > ''s'', this mechanism runs a deficit. In fact, the
Myerson–Satterthwaite theorem
The Myerson–Satterthwaite theorem is an important result in mechanism design and the economics of asymmetric information, and named for Roger Myerson and Mark Satterthwaite. Informally, the result says that there is no efficient way for two par ...
says that ''every''
Pareto-efficient
Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engine ...
truthful mechanism must incur a deficit.
McAfee
developed a solution to this problem for a large market (with many potential buyers and sellers): McAfee's mechanism is WBB, truthful and almost Pareto-efficient - it performs all efficient deals except at most one. McAfee's mechanism has been extended to various settings, while keeping its WBB property. See
double auction
A double auction is a process of buying and selling goods with multiple sellers and multiple buyers. Potential buyers submit their bids and potential sellers submit their ask prices to the market institution, and then the market institution choose ...
for more details.
Strong budget balance
In a strongly-budget-balanced (SBB) mechanism, all payments are made between the participants themselves. An advantage of SBB is that all the
gain from trade remains in the market; thus, the long-term welfare of the traders is larger and their tendency to participate may be higher.
McAfee's double-auction mechanism is WBB but not SBB - it may have a surplus, and this surplus may account for almost all the gain from trade. There is a simple SBB mechanism for bilateral trading: trade occurs iff ''b'' > ''s'', and in this case the buyer pays (''b''+''s'')/2 to the seller. Since the payment goes directly from the buyer to the seller, the mechanism is SBB; however, it is not truthful, since the buyer can gain by bidding ''b'
'' < ''b'' and the seller can gain by bidding ''s > ''s''. Recently, some truthful SBB mechanisms for double auction have been developed. Some of them have been generalized to multi-sided markets.
See also
*
Balanced budget
A balanced budget (particularly that of a government) is a budget in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). More generally, it is a budget that has no budget ...
- a budget in which revenues are equal to expenditures
*
Government budget balance
The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...
- a financial statement presenting the government's proposed revenues and spending for a financial year.
*
Balanced budget amendment
A balanced budget amendment is a constitutional rule requiring that a state cannot spend more than its income. It requires a balance between the projected receipts and expenditures of the government.
Balanced-budget provisions have been added t ...
- a rule in the USA constitution requiring that a state cannot spend more than its income.
References
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Mechanism design
Auction theory