Behaviorally optimal auction design: Examples and observations

Vincent P. Crawford, Tamar Kugler, Zvika Neeman, Ady Pauzner

Research output: Contribution to journalArticle

21 Scopus citations

Abstract

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 bid-ders. 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)

Original languageEnglish (US)
Pages (from-to)377-387
Number of pages11
JournalJournal of the European Economic Association
Volume7
Issue number2-3
DOIs
StatePublished - Mar 2009

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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