BEHAVIORALLY OPTIMAL AUCTION DESIGN: EXAMPLES AND OBSERVATIONS | Zendy

Crawford Vincent P. | Zendy; Kugler Tamar | Zendy; Neeman Zvika | Zendy; Pauzner Ady | Zendy

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BEHAVIORALLY OPTIMAL AUCTION DESIGN: EXAMPLES AND OBSERVATIONS

Author(s) -

Crawford Vincent P.,

Kugler Tamar,

Neeman Zvika,

Pauzner Ady

Publication year - 2009

Publication title -

journal of the european economic association

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 7.792

H-Index - 93

eISSN - 1542-4774

pISSN - 1542-4766

DOI - 10.1162/jeea.2009.7.2-3.377

Subject(s) - bidding , common value auction , auction theory , revenue , vickrey auction , vickrey–clarke–groves auction , microeconomics , mechanism design , economics , revenue equivalence , exploit , mathematical economics , english auction , computer science , finance , computer security

This paper begins to explore behavioral mechanism design, replacing equilibrium by a model based on “level‐ k ” thinking, which has strong support in experiments. In representative examples, we consider optimal sealed‐bid auctions with two symmetric bidders who have independent private values, assuming that the designer knows the distribution of level‐ k bidders. We show that in a first‐price auction, level‐ k bidding changes the optimal reserve price and often yields expected revenue that exceeds Myerson's (1981) bound; and that an exotic auction that exploits bidders' non‐equilibrium beliefs can far exceed the revenue bound. We close with some general observations about level‐ k auction design. (JEL: C72, C92)

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