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) © 2009 by the European Economic Association.
CITATION STYLE
Crawford, V. P., Kugler, T., Neeman, Z., & Pauzner, A. (2009). Behaviorally optimal auction design: Examples and observations. Journal of the European Economic Association, 7(2–3), 377–387. https://doi.org/10.1162/JEEA.2009.7.2-3.377
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