Mechanism design theory strongly relies on the concept of Nash equilibrium. However, studies of experimental games show that Nash equilibria are rarely played and that subjects may be thinking only a finite number of iterations. We study one of the most influential benchmarks of mechanism design theory, the expected externality mechanism (D’Aspremont and Gerard-Varet, J Public Econ 11:25–45, 1979) in a finite-depth environment described by the Level-k model. While the original mechanism may fail to implement the efficient rule in this environment, it can be adjusted to restore efficiency.
International Journal of Game Theory – Springer Journals
Published: May 17, 2017
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