Level-K Mechanism Design

26 Pages Posted: 6 Aug 2016

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: July 31, 2016

Abstract

Models of choice where agents see others as less sophisticated than themselves have significantly different, sometimes more accurate, predictions in games than does Nash equilibrium. When it comes to mechanism design, however, they turn out to have surprisingly similar implications. This paper provides tight necessary and sufficient conditions for implementation with bounded depth of reasoning, discussing the role and implications of different behavioral anchors. The central condition slightly strengthens standard incentive constraints, and we term it strict-if-responsive Bayesian incentive compatibility (SIRBIC).

Keywords: mechanism design; bounded rationality; level k reasoning; revelation principle; incentive compatibility

JEL Classification: C72, D70, D78, D82

Suggested Citation

de Clippel, Geoffrey and Saran, Rene and Serrano, Roberto, Level-K Mechanism Design (July 31, 2016). Available at SSRN: https://ssrn.com/abstract=2818539 or http://dx.doi.org/10.2139/ssrn.2818539

Geoffrey De Clippel

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 (Contact Author)

Brown University ( email )

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

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