CeNDEF Lunch Seminar: Roald Ramer (University of Amsterdam)
'On Realistic Mechanism Design or Solomon's Judgment Revisited'
An identification of the mother of the contested child has been a test for the theory of mechanism design. Yet, little attention has been given to the original Solomon’s ploy, while the modern schemes leave the insights from behavioural economics unexplored. We argue that Solomon could have never intended to divide the child, and that the success of his scheme was mainly due to its incomplete specification. A similar caveat holds for most auctions and contests in economic, social and political environments. Next, we discuss the simplest 2x2-game, where the litigants can be trusted to implement the truth-telling profile, whether it is a unique equilibrium but they do not know it, or whether they know that there is another equilibrium. Mechanisms making use of auctions are not likely to return the child with no cost to its mother in a realistic environment, i.e. where the mother cares about the fate of the child when not under her care, or the impostor enjoys making the mother to pay for her child. Instead, we propose a mechanism employing markets in subgames not reached at the unique subgame perfect equilibrium. With appropriate large penalties, it will be the unique profile surviving iterated elimination of dominated strategies. Finally, we argue that a mechanism returning the desired outcome at a unique equilibrium of some specified kind, need not be the best choice for the social planner, as there is no guarantee that such an equilibrium will be reached. The planner needs to calculate the trade-off between the expected rate of success and the costs of a failure.
Please contact Eva Levelt if you have any questions about the lecture.
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