Mechanism Design without Rational Expectations

Giacomo Rubbini

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Abstract: Is incentive compatibility still necessary for implementation if we relax the rational expectations assumption? This paper proposes a generalized model of implementation that does not assume agents hold rational expectations and characterizes the class of solution concepts requiring Bayesian Incentive Compatibility (BIC) for full implementation. Surprisingly, for a broad class of solution concepts, full implementation of functions still requires BIC even if rational expectations do not hold. This finding implies that some classical results, such as the impossibility of efficient bilateral trade (Myerson & Satterthwaite, 1983), hold for a broader range of non-equilibrium solution concepts, confirming their relevance even in boundedly rational setups.

Date: 2023-05, Revised 2023-11
New Economics Papers: this item is included in nep-des, nep-mic and nep-upt
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