An Indirect Evolutionary Justification of Risk Neutral Bidding in Fair Division Games

Abstract

We justify risk neutral equilibrium bidding in commonly known fair division games with incomplete
information by an evolutionary setup postulating (i) minimal common knowledge, (ii) optimal responses to conjectural beliefs how others behave and (iii) evolutionary selection of conjectural beliefs with fitness measured by expected payoffs. After justifying the game forms we derive the evolutionary games for first- and second-price fair division and determine the evolutionarily stable conjectures. The latter coincide with equilibrium bidding, irrespectively of the number of bidders, i.e., heuristic belief adaptation can imply the same bidding behavior as equilibrium analysis based on common knowledge and counterfactual bidding.

Keywords: Fair division games, First-and Second-price formats, risk neutrality, indirect evolutionary analysis

JEL Classification: C72, C73, D44, D45, D74