Mistakes in Dominant-Strategy Mechanisms
Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM
Hyatt Regency Chicago, Grand Suite 3
- Chair: Ran I. Shorrer, Harvard University
Suboptimal Behavior in the Residency Match: Evidence and Welfare Implications
AbstractStrategy-proof mechanisms eliminate the possibility for gain from strategic misrepresentation of
preferences. If market participants respond optimally, these mechanisms permit the observation of true
preferences and avoid the implicit punishment of market participants who do not try to "game the
system." Using new data from a flagship application of the matching literature - the medical residency
match - I study if these potential benefits are fully realized. I present evidence that some students pursue futile attempts at strategic misrepresentation, and examine the causes and correlates of this behavior. I next consider the implications of this behavior for the welfare of market participants. Misreporting of preferences has the potential to generate inefficient matches, in a manner that reduces welfare and renders the final matching unstable. However, in situations where the desirability of candidates is imperfectly observed, but correlated with propensity to misoptimize, the presence of this mistake can facilitate positive assortative matching, with offsetting welfare gains. In simulated matching markets, I explore how the market-level welfare effects of misoptimization vary as a function of preference structures and misreporting patterns.
Obviously Strategy-Proof Mechanisms
AbstractWhat makes some strategy-proof mechanisms easier to understand than others? To address this question, I propose a new solution concept: A mechanism is obviously strategy-proof (OSP) if it has an equilibrium in obviously dominant strategies. This has a behavioral interpretation: A strategy is obviously dominant if and only if a cognitively limited agent can recognize it as weakly dominant. It also has a classical interpretation: A choice rule is OSP-implementable if and only if it can be carried out by a social planner under a particular regime of partial commitment. I fully characterize the set of OSP mechanisms in a canonical setting, with one-dimensional types and transfers. A laboratory experiment tests and corroborates the theory.
Bounded Rationality and Robust Mechanism Design: An Axiomatic Approach
AbstractSubstantial experimental evidence shows that decision makers often fail to choose an available dominant strategy, in tasks requiring forming hypothetical scenarios and reason state-by-state. Our proposed axiomatic approach, Partition Obvious Preference formalizes such a deficiency in reasoning by weakening the Subjective Expected Utility Theory. We extend our approach to games and propose a new solution concept, partition dominant strategy, providing a theoretical explanation for the difference in dominant strategies and superior performance of dynamic mechanism over its strategic equivalent static implementation. Our new solution concept is a useful discovery for designers of markets and mechanisms as it enriches the class of mechanisms that perform better than those just with dominant strategy. A laboratory experiment tests our theoretical implications. Applying the concept of Nash Equilibrium to Partition Obvious Preference, we propose Partition Nash Equilibrium to identify a set of mechanisms that are more robust than mechanisms with only Ex-post Nash Equilibria.
- D0 - General
- D4 - Market Structure, Pricing, and Design