Mechanism Design without Rational Expectations

2023/05/12 by Giacomo Rubbini, Rubbini, Giacomo
Economics, Econometrics and Finance · #Economic Theory and Institutions #Economic theories and models #FOS: Economics and business #Monetary Policy and Economic Impact #Theoretical Economics (econ.TH)

paper · pdf · doi:10.48550/arxiv.2305.07472

openalex publication_date 2023/05/12 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28

Abstract

Is incentive compatibility still necessary for implementation if we relax the rational expectations assumption? This paper proposes a generalized model of implementation that does not assume agents hold rational expectations and characterizes the class of solution concepts requiring Bayesian Incentive Compatibility (BIC) for full implementation. Surprisingly, for a broad class of solution concepts, full implementation of functions still requires BIC even if rational expectations do not hold. This finding implies that some classical results, such as the impossibility of efficient bilateral trade (Myerson & Satterthwaite, 1983), hold for a broader range of non-equilibrium solution concepts, confirming their relevance even in boundedly rational setups.

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