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The expected externality mechanism in a level-k environment

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  • Olga Gorelkina

    (University of Liverpool Management School)

Abstract

Mechanism design theory strongly relies on the concept of Nash equilibrium. However, studies of experimental games show that Nash equilibria are rarely played and that subjects may be thinking only a finite number of iterations. We study one of the most influential benchmarks of mechanism design theory, the expected externality mechanism (D’Aspremont and Gerard-Varet, J Public Econ 11:25–45, 1979) in a finite-depth environment described by the Level-k model. While the original mechanism may fail to implement the efficient rule in this environment, it can be adjusted to restore efficiency.

Suggested Citation

  • Olga Gorelkina, 2018. "The expected externality mechanism in a level-k environment," International Journal of Game Theory, Springer;Game Theory Society, vol. 47(1), pages 103-131, March.
    • Handle: RePEc:spr:jogath:v:47:y:2018:i:1:d:10.1007_s00182-017-0579-5
    DOI: 10.1007/s00182-017-0579-5
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    Cited by:

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    2. Crawford, Vincent P., 2021. "Efficient mechanisms for level-k bilateral trading," Games and Economic Behavior, Elsevier, vol. 127(C), pages 80-101.
    3. Kneeland, Terri, 2022. "Mechanism design with level-k types: Theory and an application to bilateral trade," Journal of Economic Theory, Elsevier, vol. 201(C).
    4. Dvijotham, Krishnamurthy & Rabani, Yuval & Schulman, Leonard J., 2022. "Convergence of incentive-driven dynamics in Fisher markets," Games and Economic Behavior, Elsevier, vol. 134(C), pages 361-375.
    5. Aperjis, Christina & Kotowski, Maciej & Zeckhauser, Richard, 2019. "Efficient Division When Preferences are Private: Using the Expected Externality Mechanism," Working Paper Series rwp19-014, Harvard University, John F. Kennedy School of Government.
    6. Kneeland, Terri, 2017. "Mechanism design with level-k types: Theory and an application to bilateral trade," Discussion Papers, Research Unit: Economics of Change SP II 2017-303, WZB Berlin Social Science Center.

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    More about this item

    Keywords

    Expected externality; Externality mechanisms; Level-k; Bounded rationality;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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