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Mistakes in Dominant-Strategy Mechanisms

Paper Session

Saturday, Jan. 7, 2017 3:15 PM – 5:15 PM

Hyatt Regency Chicago, Grand Suite 3
Hosted By: American Economic Association
  • Chair: Ran I. Shorrer, Harvard University

“Strategic” Behavior in a Strategy-Proof Environment

Avinatan Hassidim
,
Bar-Ilan University
Assaf Romm
,
Hebrew University of Jerusalem
Ran I. Shorrer
,
Harvard University

Abstract

We present direct field evidence of preference misrepresentation under deferred acceptance. The high-stakes admission process to graduate studies in psychology in Israel was centralized using the applicant-proposing version of deferred acceptance. Yet, a large fraction of these highly educated individuals, who had been informed about the strategy-proof nature of the mechanism in numerous ways, failed to play truthfully. Out of 704 rank-ordered lists that included a non-funded position in a program that offered funded positions, we found that in 137 (over 19%) the non-funded position was ranked higher (or the funded position was not ranked at all). This is despite the fact that the applicants had been informed that rank-ordered lists are never made public, funding is considered a positive signal of ability, and funding comes with no strings attached. Preference misrepresentation is associated with the weaker segment of the market. We provide evidence from a laboratory experiment of a strong causal negative relationship between applicants’ expected desirability and preference misrepresentation.We revisit data from one of the treatments in Li (2015), where Serial Dictatorship is used to allocate common value prizes. Prior to submitting their ROL, subjects receive a strong signal on their priority rank. Nearly 30% of ROLs misrepresent true preferences. We establish a strong causal negative relationship between desirability (proxied by the priority signal) and preference misrepresentation.

Suboptimal Behavior in the Residency Match: Evidence and Welfare Implications

Alex Rees-Jones
,
University of Pennsylvania

Abstract

Strategy-proof mechanisms eliminate the possibility for gain from strategic misrepresentation of
preferences. If market participants respond optimally, these mechanisms permit the observation of true
preferences and avoid the implicit punishment of market participants who do not try to "game the
system." Using new data from a flagship application of the matching literature - the medical residency
match - I study if these potential benefits are fully realized. I present evidence that some students pursue futile attempts at strategic misrepresentation, and examine the causes and correlates of this behavior. I next consider the implications of this behavior for the welfare of market participants. Misreporting of preferences has the potential to generate inefficient matches, in a manner that reduces welfare and renders the final matching unstable. However, in situations where the desirability of candidates is imperfectly observed, but correlated with propensity to misoptimize, the presence of this mistake can facilitate positive assortative matching, with offsetting welfare gains. In simulated matching markets, I explore how the market-level welfare effects of misoptimization vary as a function of preference structures and misreporting patterns.

Obviously Strategy-Proof Mechanisms

Shengwu Li
,
Stanford University

Abstract

What makes some strategy-proof mechanisms easier to understand than others? To address this question, I propose a new solution concept: A mechanism is obviously strategy-proof (OSP) if it has an equilibrium in obviously dominant strategies. This has a behavioral interpretation: A strategy is obviously dominant if and only if a cognitively limited agent can recognize it as weakly dominant. It also has a classical interpretation: A choice rule is OSP-implementable if and only if it can be carried out by a social planner under a particular regime of partial commitment. I fully characterize the set of OSP mechanisms in a canonical setting, with one-dimensional types and transfers. A laboratory experiment tests and corroborates the theory.

Bounded Rationality and Robust Mechanism Design: An Axiomatic Approach

Luyao Zhang
,
Ohio State University
Dan Levin
,
Ohio State University

Abstract

Substantial experimental evidence shows that decision makers often fail to choose an available dominant strategy, in tasks requiring forming hypothetical scenarios and reason state-by-state. Our proposed axiomatic approach, Partition Obvious Preference formalizes such a deficiency in reasoning by weakening the Subjective Expected Utility Theory. We extend our approach to games and propose a new solution concept, partition dominant strategy, providing a theoretical explanation for the difference in dominant strategies and superior performance of dynamic mechanism over its strategic equivalent static implementation. Our new solution concept is a useful discovery for designers of markets and mechanisms as it enriches the class of mechanisms that perform better than those just with dominant strategy. A laboratory experiment tests our theoretical implications. Applying the concept of Nash Equilibrium to Partition Obvious Preference, we propose Partition Nash Equilibrium to identify a set of mechanisms that are more robust than mechanisms with only Ex-post Nash Equilibria.
JEL Classifications
  • D0 - General
  • D4 - Market Structure, Pricing, and Design