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Efficient mechanisms for level-k bilateral trading

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  • Crawford, Vincent P

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.
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  • Crawford, Vincent P, 2021. "Efficient mechanisms for level-k bilateral trading," University of California at San Diego, Economics Working Paper Series qt4748b7r2, Department of Economics, UC San Diego.
    • Handle: RePEc:cdl:ucsdec:qt4748b7r2
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    3. Rivera Mora, Ernesto, 2024. "Mechanism design with belief-dependent preferences," Journal of Economic Theory, Elsevier, vol. 216(C).
    4. Giacomo Rubbini, 2023. "Mechanism Design without Rational Expectations," Papers 2305.07472, arXiv.org, revised Nov 2023.
    5. Kneeland, Terri, 2022. "Mechanism design with level-k types: Theory and an application to bilateral trade," Journal of Economic Theory, Elsevier, vol. 201(C).
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    More about this item

    Keywords

    Prevention; Mechanism design; Bilateral trading; Level-k thinking; Behavioral game theory; Economic Theory; Applied Economics;
    All these keywords.

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact

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