 Efficient mechanisms for level-k bilateral tradingGames and Economic Behavior, 2021, vol. 127, issue C, 80-101 Abstract: This paper revisits Myerson and Satterthwaite's (1983) classic analysis of mechanism design for bilateral trading, replacing equilibrium with a level-k model of strategic thinking and focusing on direct mechanisms. The revelation principle fails for level-k models, so restricting attention to direct mechanisms and imposing incentive-compatibility are not without loss of generality. If, however, only direct, level-k-incentive-compatible mechanisms are feasible and traders' levels are observable, Myerson and Satterthwaite's characterization of mechanisms that maximize traders' total surplus subject to incentive constraints generalizes qualitatively to level-k models. If only direct, level-k-incentive-compatible mechanisms are feasible but traders' levels are not observable, generically a particular posted-price mechanism maximizes traders' total expected surplus subject to incentive constraints. If direct, non-level-k-incentive-compatible mechanisms are feasible and traders best respond to them, total expected surplus-maximizing mechanisms may take completely different forms. Keywords: Mechanism design; Bilateral trading; Level-k thinking; Behavioral game theory (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:gamebe:v:127:y:2021:i:c:p:80-101 DOI: 10.1016/j.geb.2021.02.005 Access Statistics for this article Games and Economic Behavior is currently edited by E. Kalai More articles in Games and Economic Behavior from Elsevier |
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