Arbeitspapier

Mechanism design with bounded depth of reasoning and small modeling mistakes

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.

Language
Englisch

Bibliographic citation
Series: Working Paper ; No. 2014-7

Classification
Wirtschaft
Noncooperative Games
Analysis of Collective Decision-Making: General
Positive Analysis of Policy Formulation and Implementation
Asymmetric and Private Information; Mechanism Design
Subject
mechanism design
bounded rationality
level k reasoning
small modeling mistakes
incentive compatibility
continuity

Event
Geistige Schöpfung
(who)
De Clippel, Geoffroy
Saran, Rene
Serrano, Roberto
Event
Veröffentlichung
(who)
Brown University, Department of Economics
(where)
Providence, RI
(when)
2014

Handle
Last update
10.03.2025, 11:43 AM CET

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Object type

  • Arbeitspapier

Associated

  • De Clippel, Geoffroy
  • Saran, Rene
  • Serrano, Roberto
  • Brown University, Department of Economics

Time of origin

  • 2014

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