Continuous Level-k Mechanism Design

Abstract

In de Clippel, Saran, and Serrano (2019), it is shown that, perhaps surprisingly, the set of implementable social choice functions is essentially the same whether agents have bounded depth of reasoning or rational expectations. The picture is quite different when taking into account the possibility of small modeling mistakes. While continuous strict implementation becomes very demanding (Oury and Tercieux (2012) – OT), continuity in level-k implementation obtains essentially for free. A decomposition of the conditions implied by the OT implementation notion confirms that it is the use of equilibrium, and not continuity per se, that is responsible for the difference.

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

JEL Classification: C72, D70, D78, D82