[Intended for a more general audience. Initial draft: comment welcome]
Adjusted Winner Procedure
The Adjusted Winner procedure is a well-known fair division mechanism to settle disputes and divide resource between two parties. It was proposed by political scientist Steven Brams and mathematician Alan Taylor:
Since the allocation of resources is typically seen in the context of conflict and cooperation, the parties are referred to as agents or player as is standard in the field of game theory.
Adjusted Winner has been advocated as a fair division rule for divorce settlements, international border conflicts and real estate disputes. It has been termed as a way to obtain a win-win solution. For example, it has been shown that the agreement reached during Jimmy Carter’s presidency between Israel and Egypt is very close to what Adjusted Winner would have predicted.
Adjusted Winner has been patented by New York University and licensed to the law firm Fair Outcomes, Inc.
Adjusted winner works as follows.
Each of the two agents is given a certain number of total points (say 100) to bid on the items. In the first stage, each item is given to the agent that bids more for it. If both agents have the same bid for an item, the item is given to one of the two agents according to some tie-breaking rule. In the second stage, we check whether the number of points allocated to each of the agents is equal, then the tentative allocation from the first stage is the final allocation. Otherwise, if one agent say A has more points than agent B, then agent A needs to give some items(s) to B. The first item to be given to B is the one in which was tentatively allocated to A but for which the ratio of A's bid to B's bid is the lowest. Such items are reallocated to B until both A and B get exactly the same number of points from their respective allocation.
Illustrative Example of Adjusted Winner: The following example taken from here shows how a divorce dispute can be solved via Adjusted Winner. Consider the following hypothetical divorce dispute in which Bob and Carol bid a total of 100 points on the disputed issues/items. In the first stage, custody is given to Carol whereas the house and alimony is given to Bob because he has higher bids for the house and alimony. Carol gets 65 points via this tentative allocation whereas Bob gets 75. This means that Bob needs to give a portion (40%) of the house to Carol so that both get equal points. The Adjusted Winner procedure gives whole of Alimony to Bob, the sole custody to Carol. 40% of the house is given to Carol and 60% of the house is given to Bob.
Whenever allocations are made in practice, different people can have different ideas about whether the allocation is fair or not. An axiomatic approach can be taken to judge the desirability of an allocation: properties of allocations are formalized and it is then mathematically verified whether a given allocation satisfies those properties.
The Adjusted Winner rule has been advocated because it satisfies desirable axiomatic properties:
Pareto optimality: both agents cannot be happier by some re-allocation.
Envy-freeness: no agent envies the other agent and prefers the other agent's allocation over its own.
Equitability: both agents get the same number of points.
Pareto optimality is one of the most important notions of efficiency in economics and was proposed by Italian polymath Vilfredo Pareto. Envy-freeness captures a very basic fairness condition. Psychologically, people may not be happy be with an allocation if they prefer another person’s allocation. Finally equitability tries to capture the goal that both agents are "equally happy".
Characterizing the Adjusted Winner Procedure
The fact that Adjusted Winner satisfies nice properties does not mean it is the only mechanism satisfying these properties. Recently, we have written a report (Haris Aziz, Simina Brânzei, Aris Filos-Ratsikas, Søren Kristoffer Stiil Frederiksen. The Adjusted Winner Procedure: Characterizations and Equilibria. arXiv:1503.06665.2015) in which we show that Adjusted Winner is in fact the only mechanism that satisfies these properties:
Adjusted Winner is the only Pareto optimal and equitable mechanism that requires the fractional allocation of at most one item.
If valuations/bids of the agents are different for each item, then the only Pareto optimal and equitable allocation is the result of Adjusted Winner.
Strategic Behaviour and the Adjusted Winner Procedure
The above theorems further reinforce the desirability of Adjusted Winner. Although Adjusted Winner is a desirable mechanism, its properties are satisfied assuming agents report their truthful valuations. However agents can in principle misreport their valuations if they know they will get an even better allocation by doing so. It is known that Adjusted Winner is susceptible to such a manipulation: an agent can misreport its bids to get additional utility if it knows the valuations of the other agent (as may be the case for example in divorce proceedings). In the example above, Carol has an incentive to lie about her valuations and slightly under-report her value for sole custody in order to get a bigger portion of the house and still retain the sole custody!
When agents may have incentive to misreport and "game" the procedure, it is natural to study what kind of outcomes strategic behaviour will lead to and under what combinations of valuations, no agent would have an incentive to change its reported valuation. Such combinations of valuations are called pure Nash equilibria.
In our technical report, we also examined the strategic aspects of Adjusted Winner. In particular, we check whether a pure Nash equilibrium exists or not. The results are mixed: pure Nash equilibria may not exist in general but exist if informed tie breaking is used that orders the items in a way to favour one of the agents. On the other hand an epsilon-Nash equilibrium (that can be considered in lay terms as "almost pure Nash equilibrium") exists even if informed tie breaking is not used.
A major concern when a mechanism is not strategyproof is that its normative properties may not be met under strategic behaviour.
However, we have positive news regarding Adjusted Winner:
A pure Nash equilibrium is envy-free and Pareto optimal and guarantees 75% of the maximum social welfare!
Hence, even under strategic behaviour, Adjusted Winner does a good job in terms of fairness, efficiency, and welfare.