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Efficiency Measurement via Revealed Thresholds, Without Knowing Valuations

Laboratory experiments employing an induced-values methodology often report on allocative efficiencies observed. That methodology requires experimenters know subjects’ motivations precisely, questionable in labs, impossible in field experiments. Allocative efficiency implies a hypothetical costless aftermarket would be inactive. An allocation mechanism’s outcome is defined to be behaviorally efficient if an appropriate aftermarket is actually appended to the mechanism and measures at most a negligible size of remaining mutually beneficial gains. Methodological requirements for an appropriate aftermarket are specified. A first demonstration observes more frequent and ex-ante larger behavioral inefficiencies in second- than in first-price auctions. A simple field demonstration indicates when a public-good increase can be observed to cover marginal cost to subjects’ mutual benefit, without knowing valuations. A wide variety of empirical economic-policy studies can utilize this methodology to observe comparative evidence of alternative policies’ allocativeefficiency shortfalls.

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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1603.

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Length: 41 pgs.
Date of creation: 02 Feb 2014
Date of revision: 01 Mar 2016
Handle: RePEc:umc:wpaper:1603
Note: This paper combines and updates work in WP11-20 & WP11-21
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  1. Kagel, John H & Levin, Dan & Harstad, Ronald M, 1995. "Comparative Static Effects of Number of Bidders and Public Information on Behavior in Second-Price Common Value Auctions," International Journal of Game Theory, Springer;Game Theory Society, vol. 24(3), pages 293-319.
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  9. Ronald M Harstad, 2011. "Behavioral Efficiency I: Definition, Methodology and Demonstration," ISER Discussion Paper 0818, Institute of Social and Economic Research, Osaka University.
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  18. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
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