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Mechanism Design and Intentions

Felix Bierbrauer, Nick Netzer
University of Cologne, Working Paper Series in Economics No. 53, 2012

JEL codes: C70, C72, D02, D03, D82, D86 

Keywords: Mechanism Design; Psychological Games; Social Preferences; Intentions; Reciprocity; Revelation Principle

We introduce intention-based social preferences into a Bayesian mechanism design framework. We first show that, under common knowledge of social preferences, any tension between material efficiency, incentive compatibility, and voluntary participation can be resolved. Hence, famous impossibility results such as the one by Myerson and Satterthwaite (1983) are turned into possibility results. Second, we provide a systematic account of the welfare implications of kindness sensations. Finally, we turn to an environment without common knowledge of social preferences and introduce the notion of a psychologically robust mechanism. Such a mechanism can be implemented without information about the type or the intensity of social preferences. We show that the mechanisms which have been the focus of the conventional mechanism design literature can be modified to achieve psychological robustness.

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