Mechanism Design with Moral Bidders

A rapidly growing literature on lying in behavioral economics and psychology shows that individuals often do not lie even when lying maximizes their utility. The paper presented in this Virtual Market Design Seminar attempts to incorporate these findings into the theory of mechanism design. The authors consider players that have a preference for truth-telling and will only lie if their benefit from lying is sufficiently larger than the loss of the others. To accommodate such players, the authors introduce α-moral mechanisms, in which the gain of a player from misreporting his true value, comparing to truth-telling, is at most α times the loss that the others incur due to misreporting. Note that a 0-moral mechanism is a truthful mechanism. The authors develop a theory of moral mechanisms in the canonical setting of single-item auctions within the “reasonable” range of α, 0 ≤ α ≤ 1. They identify similarities and disparities to the standard theory of truthful mechanisms. In particular, we show that the allocation function does not uniquely determine the payments and is unlikely to admit a simple characterization. In contrast, recall that monotonicity characterizes the allocation function of truthful mechanisms. The main technical effort of this paper is invested in determining whether the auctioneer can exploit the preference for truth-telling of the players to extract more revenue comparing to truthful mechanisms. The authors show that the auctioneer can indeed extract more revenue when the values of the players are correlated, even when there are only two players. However, they show that truthful mechanisms are revenue-maximizing even among moral ones when the values of the players are independently drawn from certain identical distributions (e.g., the uniform and exponential distributions). A by-product of the proof in this paper that optimal moral mechanisms are truthful is an alternative proof to Myerson’s optimal truthful mechanism characterization in the settings that the authors consider. The authors flesh out this approach by providing an alternative proof that does not involve moral mechanisms to Myerson’s characterization of optimal truthful mechanisms to all settings in which the values are independently drawn from regular distributions (not necessarily identical).