Going…Going…Wrong: A Test of the Level-k (and Cognitive-Hierarchy) Models of Bidding Behavior

Itzhak Rasooly

Journal of Political Economy Microeconomics, 2023, vol. 1, issue 2, 400 - 445

Abstract: In this paper, we design and implement an experiment aimed at testing the level-k model of auctions. We begin by identifying (simple) environments that optimally disentangle the predictions of the level-k model from the natural benchmark of Bayes-Nash equilibrium. We then implement these environments within a virtual laboratory in order to see which theory can best explain observed bidding behavior. Overall, our findings suggest that, despite its notable success in predicting behavior in other strategic settings, the level-k model (and its close cousin, cognitive hierarchy) cannot explain behavior in auctions.

Date: 2023
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