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Foundations of Dominant Strategy Mechanisms

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  • Kim-Sau Chung
  • Jeffrey C. Ely

Abstract

Wilson (1987) criticizes the existing literature of game theory as relying too much on common-knowledge assumptions. In reaction to Wilson's critique, the recent literature of mechanism design has started to employ stronger solution concepts such as dominant strategy incentive compatibility, and restrict attention to simpler mechanisms such as dominant strategy mechanisms. However, there has been little theory behind this approach. In particular, it has not been made clear why employing simpler mechanisms, instead of more complicated ones, is the correct way to address Wilson's critique. This paper aims at filling this void. We propose a potential theory, known as the {\it maxmin} theory, which postulates that a {\it cautious} mechanism designer, facing uncertainty over which (common-knowledge) assumptions are valid and which are not, would indeed rationally choose simpler mechanisms such as dominant strategy mechanisms. In this paper, we summarize our progress in proving this theory, explore other possible theories, and discuss related theoretical questions that will be of interest in other areas

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Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1372.

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Date of creation: Jun 2003
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Handle: RePEc:nwu:cmsems:1372

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  1. Barton L. Lipman, 2003. "Finite Order Implications of Common Priors," Econometrica, Econometric Society, vol. 71(4), pages 1255-1267, 07.
  2. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
  3. Brandenburger Adam & Dekel Eddie, 1993. "Hierarchies of Beliefs and Common Knowledge," Journal of Economic Theory, Elsevier, vol. 59(1), pages 189-198, February.
  4. Neeman, Zvika, 2004. "The relevance of private information in mechanism design," Journal of Economic Theory, Elsevier, vol. 117(1), pages 55-77, July.
  5. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
  6. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
  7. P. Dasgupta & Eric Maskin, 1998. "Efficient Auctions," Harvard Institute of Economic Research Working Papers 1857, Harvard - Institute of Economic Research.
  8. Dirk Bergemann & Stephen Morris, 2005. "Robust Mechanism Design," Econometrica, Econometric Society, vol. 73(6), pages 1771-1813, November.
  9. Faruk Gul, 1998. "A Comment on Aumann's Bayesian View," Econometrica, Econometric Society, vol. 66(4), pages 923-928, July.
  10. repec:wop:humbsf:2000-72 is not listed on IDEAS
  11. Ilya Segal, 2003. "Optimal Pricing Mechanisms with Unknown Demand," American Economic Review, American Economic Association, vol. 93(3), pages 509-529, June.
  12. Neeman, Zvika, 2003. "The effectiveness of English auctions," Games and Economic Behavior, Elsevier, vol. 43(2), pages 214-238, May.
  13. Roger B. Myerson, 1978. "Optimal Auction Design," Discussion Papers 362, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Motty Perry & Philip J. Reny, 2002. "An Efficient Auction," Econometrica, Econometric Society, vol. 70(3), pages 1199-1212, May.
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