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Evaluating Behavioral Incentive Compatibility: Insights from Experiments

Author

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  • David Danz
  • Lise Vesterlund
  • Alistair J. Wilson

Abstract

Incentive compatibility is core to mechanism design. The success of auctions, matching algorithms, and voting systems all hinge on the ability to select incentives that make it in the individual's interest to reveal their type. But how do we test whether a mechanism that is designed to be incentive compatible is actually so in practice, particularly when faced with boundedly rational agents with nonstandard preferences? We review the many experimental tests that have been designed to assess behavioral incentive compatibility, separating them into two categories: indirect tests that evaluate behavior within the mechanism, and direct tests that assess how participants respond to the mechanism's incentives. Using belief elicitation as a running example, we show that the most popular elicitations are not behaviorally incentive compatible. In fact, the incentives used under these elicitations discourage rather than encourage truthful revelation.

Suggested Citation

  • David Danz & Lise Vesterlund & Alistair J. Wilson, 2024. "Evaluating Behavioral Incentive Compatibility: Insights from Experiments," Journal of Economic Perspectives, American Economic Association, vol. 38(4), pages 131-154, Fall.
    • Handle: RePEc:aea:jecper:v:38:y:2024:i:4:p:131-54
    DOI: 10.1257/jep.38.4.131
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    More about this item

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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