Doctor of Philosophy, The Ohio State University, 2018, Economics
Mechanism Design Theory, introduced by 2007 Nobel laureates Hurwicz, Maskin, and Myerson, has guided economic institutions worldwide to achieve desirable goals in allocating scarce resources. However, most of the literature on Mechanism Design Theory that guides its application, in reality, assumes that people are fully rational; this omission of people's bounded rationality raises doubt over the reliability of the theory's empirical implications. To bridge this gap between theory and reality, we introduce new formalizations to characterize new types of boundedly rational behavior that is missing in existing models but supported by experimental evidence.
NLK, the first formalization we propose, is a new solution concept in Game Theory that connects two existing ones, Nash Equilibrium (NE) and Level-K model. Of these two, NE, introduced by 1994 Nobel Laureates John Nash has revolutionized the economics of Industrial Organization and has influenced many other branches such as the theories of monetary policy and international trade. However, there is mounting and robust evidence from laboratory experiments of substantial discrepancy between the predictions of NE and the behavior of players. Among all the alternative models that retain the individual rationality of optimization, but relax correct beliefs, Level-K model is probably the most prominent. Absent in NE, Level-K model explicitly allows players to consider their opponent as less sophisticated than themselves. But Level-K does not allow players to use an important element of strategic thinking, namely, “put yourself in the others' shoes” and believe the opponent can think in the same way they do. Bridging NE and Level-K, NLK allows a player in a game to believe that her opponent may be either less- or as sophisticated as they—a view supported by various studies in Psychology. We compare the performance of NLK to that of NE and some versions of Level-K by applying it to data from three experimental papers pub (open full item for complete abstract)
Committee: James Peck (Committee Member); Dan Levin (Committee Member); Paul Healy (Committee Member)
Subjects: Applied Mathematics; Behavioral Psychology; Behavioral Sciences; Cognitive Psychology; Economic Theory; Economics; Epistemology; Ethics; Experimental Psychology; Neurosciences; Philosophy of Science; Psychology