Bounded Rationality and Robust Mechanism Design: An Axiomatic Approach

Luyao Zhang; Dan Levin

doi:10.1257/aer.p20171030

Bounded Rationality and Robust Mechanism Design: An Axiomatic Approach

¹ Ohio State University, 410 Arps Hall, 1945 N. High Street, Columbus, OH 43210 (e-mail: ) · ² Ohio State University, 433B Arps Hall, 1945 N. High Street, Columbus, OH 43210 (e-mail: )

American Economic Review 2017

We propose an axiomatic approach to study the superior performance of mechanisms with obviously dominant strategies to those with only dominant strategies. Guided by the psychological inability to reason state-by-state, we develop Obvious Preference as a weakening of Subjective Expected Utility Theory. We show that a strategy is an obviously dominant if and only if any Obvious Preference prefer it to any deviating strategy at any reachable information set. Applying the concept of Nash Equilibrium to Obvious Preference, we propose Obvious Nash Equilibrium to identify a set of mechanisms that are more robust than mechanisms with only Nash Equilibria.

DOI: 10.1257/aer.p20171030
Volume: 107 (5)
Pages: 235-239
Language: en
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