Lea Nagel, Stanford University

Abstract

We show that achieving dominant strategy incentive compatibility often requires to choose a mechanism which severely limits what agents can observe about others’ previous moves. However, experiments and theoretical arguments suggest increasing the transparency of a mechanism’s extensive form can improve reliability of its predictions—even if it breaks the dominant strategy property.

To help resolve this dilemma, we define as-if dominant strategy mechanisms: (i) Each agent has at least one strategy that becomes dominant if the others were restricted to behave as if the mechanism was static, and (ii) all combinations of such strategies are ex-post equilibria. To behavioral agents who neglect that others may condition their behavior in sophisticated ways, the incentives of these mechanisms resemble those of a dominant strategy one.

Our framework rationalizes the auction format chosen by prominent online platforms, such as eBay. It also provides a unified explanation for experimental evidence in various settings. Further, we identify simple conditions under which as-if dominant strategy mechanisms are weak dominance solvable.