Partition Obvious Preference and Mistrust in Mechanism Design: Theory and Experiment

48 Pages Posted: 6 Mar 2017 Last revised: 25 Mar 2019

See all articles by Luyao Zhang

Luyao Zhang

Duke Kunshan University

Dan Levin

Ohio State University (OSU) - Economics

Date Written: October 22, 2018

Abstract

Substantial evidence in field, lab and thought experiments in multiple disciplines, shows that decision makers often choose a dominated strategy, which contradicts with current economic theory. To bridge this gap between theory and evidence, first, we propose two alternative axiomatic approaches, formalizing a distinct defect in human reasoning and tying together a broad range of evidence for the choice of dominated strategies. Second, we extend the theory to game theory and mechanism design, where we identify a rich class of mechanisms that successfully achieve desirable goals even with boundedly rational agents or agents who mistrust the market makers. Third, we test and verify our theory and its implications by a laboratory experiment. Finally, we address how our approach contributes to accomplishing two goals simultaneously in modelling bounded rationality: stimulating transdisciplinary conversations and providing a unified framework.

Keywords: Mechanism Design, Bounded Rationality, Decision Theory, Game Theory, Interdisciplinary Conversations

JEL Classification: C70, D81, D82

Suggested Citation

Zhang, Luyao and Levin, Dan, Partition Obvious Preference and Mistrust in Mechanism Design: Theory and Experiment (October 22, 2018). Available at SSRN: https://ssrn.com/abstract=2927190 or http://dx.doi.org/10.2139/ssrn.2927190

Luyao Zhang (Contact Author)

Duke Kunshan University ( email )

No. 8 Duke Avenue
Kunshan, Jiangsu 215316
China

HOME PAGE: http://scholars.duke.edu/person/luyao.zhang

Dan Levin

Ohio State University (OSU) - Economics ( email )

1945 N. High Street
Columbus, OH 43210-1172
United States

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