Cramton's research has followed three related themes: bargaining, auctions and market design. Climate policy is one important application of market design.
Bargaining In the beginning of his career, Cramton's research was focused on bargaining. His first published article, which appeared in the
Review of Economic Studies, analyzed a dynamic bargaining model where the seller makes repeated offers to a buyer. The paper shows how timing and information affect the rational behavior of agents when commitment is not possible. Since the bargainers are uncertain about whether trade is desirable, they must communicate some of their private information before an agreement can be reached. This need for learning, due to incomplete information about preferences, results in bargaining inefficiencies: trade often occurs after costly delay. Thus, the model provided an explanation for the inefficient bargaining behavior that often occurs in practice. His 1992
American Economic Review article with Joe Tracy is the best known of several of his papers that crossed over between bargaining and labor economics. They augment the standard bargaining model with additional moves— strikes and holdouts. They develop a private-information model of contract negotiations between the union and management, in which the form of dispute can signal the player's value.
Auctions Cramton has also written many well-cited articles assessing spectrum auctions. The best known of these was published in the 1997 Journal of Economics & Management Strategy. It assessed the first several FCC broadband auctions. His 1995 article, "Money Out of Thin Air: The Nationwide Narrowband PCS Auction", also in the Journal of Economics & Management Strategy, provides extensive analysis of the first FCC spectrum auction (Auction #1). The paper identifies key elements of bidding strategy, such as demand reduction, and identifies design flaws that the FCC ultimately corrected, such as bid signaling with the trailing digits of bids.
Market design Cramton's first foray in the area of market design was when, with two graduate school friends, he wrote his 1985
Econometrica paper on dissolving a partnership efficiently.
Roger Myerson and
Mark Satterthwaite had recently written their classic paper proving that, with two-sided incomplete information, independent private values and overlapping supports, any budget-balanced mechanism for selling a good is necessarily inefficient. Cramton and his co-authors considered the scenario where two or more partners jointly own an asset. Each partner has a valuation for the asset. As in the bargaining model, the valuations are known privately and drawn independently from a common probability distribution. They characterize the set of all incentive compatible and interim-individually-rational trading mechanisms and give a simple necessary and sufficient condition for such mechanisms to dissolve the partnership efficiently. A bidding game is constructed that achieves such dissolution whenever it is possible. In contrast to Myerson and Satterthwaite's result, a partnership can be dissolved efficiently provided no single partner owns too large a share. The paper highlights that Myerson and Satterthwaite's inefficiency results depends both on uncertainty about the existence of gains from trade and the extreme asymmetry in ownership of buyer-seller bargaining. When the ownership asymmetry is reduced, efficient trade becomes possible. Cramton's most-cited market design paper is his 2014
Review of Economic Studies article on demand reduction. Together with co-authors Larry Ausubel, Marek Pycia,
Marzena Rostek and Marek Weretka, he considers auctions involving the sale of many related goods, such as Treasury auctions, spectrum auctions and electricity auctions. In multi-unit auctions, a bid for one unit may affect payments for other units won, giving rise to an incentive to shade bids differently across units. They establish that such differential bid shading results generically in ex post inefficient allocations in the uniform-price and pay-as-bid auctions. They also show that, in general, the efficiency and revenue rankings for the two formats are ambiguous. However, in settings with symmetric bidders, the pay-as-bid auction often outperforms. With diminishing
marginal utility, symmetric information and linearity, pay-as-bid yields greater expected revenues. They explain the rankings through multi-unit effects, which have no counterparts in auctions with unit demands. They attribute the new incentives separately to multi-unit but constant marginal utility and diminishing marginal utility. In the 2015 Quarterly
Journal of Economics piece, Cramton and co-authors Eric Budish and John Shim argued that the high-frequency trading arms race is a symptom of flawed market design. Their key insight is that obvious mechanical arbitrage opportunities, like those observed in the data, are built into the current market design, which uses a continuous limit order book. The resulting arbitrage rents harm liquidity provision and induce a never-ending socially wasteful arms race for speed. Instead of the current market design, they argue that financial exchanges should use frequent batch auctions: uniform price double auctions conducted, e.g., every tenth of a second. That is, time should be treated as discrete instead of continuous, and orders should be processed in a batch auction instead of serially. Discrete time reduces the value of tiny speed advantages, and the auction transforms competition on speed into competition on price. Consequently, frequent batch auctions eliminate the arbitrage rents, enhance liquidity for investors, and put an end to the high-frequency trading arms race. As chair of the market design area at the University of Cologne. His academic duties focus on theoretical, empirical, and experimental research in market design. Practical work includes advising governments and companies on the design and implementation of specific markets.
Climate policy In 1999, Cramton co-authored a book chapter with Suzi Kerr entitled "The Distributional Effects of Carbon Regulation", published in
The Market and the Environment. They proposed that an auction of carbon permits, as opposed to grand fathering, is more desirable, because it avoids windfall gains to polluters. The idea was developed further in a paper in Energy Policy. Early adopters of
emission trading schemes, such as the European Union, initially grand fathered allowances in proportion to emissions. However, consistent with the Cramton-Kerr analysis, large windfall profits to these polluters ultimately drove the EU to auction allowances. In a 2015 article in
Nature, and in the book,
Global Carbon Pricing, Cramton and his co-authors explain that reciprocity is an essential missing ingredient in promoting cooperation in climate negotiations among countries. == Awards and honors ==