Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
Evaluating Behavioral Incentive Compatibility: Insights from Experiments
Journal of Economic Perspectives
vol. 38,
no. 4, Fall 2024
(pp. 131–54)
(Complimentary)
Abstract
Incentive compatibility is core to mechanism design. The success of auctions, matching algorithms, and voting systems all hinge on the ability to select incentives that make it in the individual's interest to reveal their type. But how do we test whether a mechanism that is designed to be incentive compatible is actually so in practice, particularly when faced with boundedly rational agents with nonstandard preferences? We review the many experimental tests that have been designed to assess behavioral incentive compatibility, separating them into two categories: indirect tests that evaluate behavior within the mechanism, and direct tests that assess how participants respond to the mechanism's incentives. Using belief elicitation as a running example, we show that the most popular elicitations are not behaviorally incentive compatible. In fact, the incentives used under these elicitations discourage rather than encourage truthful revelation.Citation
Danz, David, Lise Vesterlund, and Alistair J. Wilson. 2024. "Evaluating Behavioral Incentive Compatibility: Insights from Experiments." Journal of Economic Perspectives, 38 (4): 131–54. DOI: 10.1257/jep.38.4.131Additional Materials
JEL Classification
- C90 Design of Experiments: General
- D82 Asymmetric and Private Information; Mechanism Design
- D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
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