Equilibrium rejection of a mechanism.(Report) Celik, Gorkem; Peters, Michael

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Celik, Gorkem ; Peters, Michael
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Games and Economic Behavior
Psychology and mental health
To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.geb.2011.03.009 Byline: Gorkem Celik (a), Michael Peters (b) Keywords: Mechanism design; Default game; Cartel agreements Abstract: We study a mechanism design problem in which players can take part in a mechanism to coordinate their actions in a default game. By refusing to participate in the mechanism, a player can revert to playing the default game non-cooperatively. We show with an example that some allocation rules are implementable only with mechanisms which will be rejected on the equilibrium path. In our construction, a refusal to participate conveys information about the types of the players. This information causes the default game to be played under different beliefs, and more importantly under different higher order beliefs, than the interim ones. We find a lower bound on all the implementable payoffs. We use this bound to establish a condition on the default game under which all the implementable outcomes are truthfully implementable, without the need to induce rejection of the mechanism. Author Affiliation: (a) ESSEC Business School and THEMA, Cergy Pontoise, 95021, France (b) The University of British Columbia, Vancouver, BC, V6T 1Z1, Canada Article History: Received 20 October 2008 Article Note: (footnote) [star] We thank the associate editor and two referees for many useful comments and suggestions. This paper was presented at Columbia University, Universite Paris IX-Dauphine, Paris School of Economics, the University of British Columbia, University of Waterloo, University of Guelph, ESSEC, THEMA, Ecole Polytechnique, University of Washington, University of Essex, and at various conferences and workshops. We are grateful for the insightful comments we received from the audiences, and especially from Francoise Forges and Philippe Jehiel. Earlier versions of this paper benefited from detailed comments by Alberto Motta and Takuro Yamashita. We also thank the European Union (Marie Curie Reintegration Grant), SSHRC Canada, and ESSEC Research Center for financial support.
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