Mechanism Design with Bounded Depth of Reasoning and Small Modeling Mistakes

37 Pages Posted: 29 Jun 2014

See all articles by Geoffroy de Clippel

Geoffroy de Clippel

Brown University - Department of Economics

Rene Saran

University of Cincinnati - Department of Economics

Roberto Serrano

Brown University

Date Written: June 27, 2014

Abstract

We consider mechanism design in contexts in which agents exhibit bounded depth of reasoning (level k) instead of rational expectations. We use simple direct mechanisms, in which agents report only first-order beliefs. While level 0 agents are assumed to be truth tellers, level k agents best-respond to their belief that other agents have at most k-1 levels of reasoning. We find that incentive compatibility is necessary for implementation in this framework, while its strict version alone is sufficient. Adding continuity to both directions, the same results are obtained for continuous implementation with respect to small modeling mistakes. We present examples to illustrate the permissiveness of our findings in contrast to earlier related results under the assumption of rational expectations.

Keywords: mechanism design; bounded rationality; level k reasoning; small modeling mistakes; incentive compatibility; continuity

JEL Classification: C72, D70, D78, D82

Suggested Citation

de Clippel, Geoffrey and Saran, Rene and Serrano, Roberto, Mechanism Design with Bounded Depth of Reasoning and Small Modeling Mistakes (June 27, 2014). Available at SSRN: https://ssrn.com/abstract=2460019 or http://dx.doi.org/10.2139/ssrn.2460019

Geoffrey De Clippel (Contact Author)

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

Rene Saran

University of Cincinnati - Department of Economics ( email )

Carl H. Lindner Hall 2925 Campus Green Drive
PO Box 0371
Cincinnati, OH 45221-0211
United States

Roberto Serrano

Brown University ( email )

64 Waterman Street
Providence, RI 02912
United States
401-863-1036 (Phone)
401-863-1970 (Fax)

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