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Vincent Crawford (University of Oxford): "Efficient Mechanisms for Level-k Bilateral Trading"

3 Oct
Vincent Crawford - big
Part of Research Seminars in Economics

Every week, the Economics Group of King's Business School organises research seminars in economics. Bi-weekly research seminars in economics are organised by the Economics Group of King's Business School together with economists at the Department of Political Economy and Department of International Development. For more information on our activities visit Economics at King's.

This week we welcome Vince Crawford (University of Oxford).

"Efficient Mechanisms for Level-k Bilateral Trading"


I revisit Roger Myerson and Mark Satterthwaite’s (1983; “MS”) analysis of mechanism design for bilateral trading, replacing equilibrium with a nonequilibrium “level-k” model that predicts initial responses to games, and focusing on direct mechanisms. The revelation principle fails for level-k models. However, if only level-k-incentive-compatible mechanisms are feasible, MS’s result that no incentive-compatible mechanism can assure ex-post efficiency generalizes. If traders’ levels are observable, MS’s characterization of incentive-efficient mechanisms generalizes, with one novel feature. If they’re unobservable, only posted-price mechanisms are level-k-incentive-compatible and -incentive-efficient. If non-level-k-incentive-compatible direct mechanisms are feasible, level-k-incentive-efficient mechanisms may differ more extensively from equilibrium-incentive-efficient mechanisms.

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