Efficiency Measurement via Revealed Thresholds, Without Knowing Valuations
Laboratory experiments employing an induced-values methodology often report on allocative efficiencies observed. That methodology requires experimenters know subjects’ motivations precisely, questionable in labs, impossible in field experiments. Allocative efficiency implies a hypothetical costless aftermarket would be inactive. An allocation mechanism’s outcome is defined to be behaviorally efficient if an appropriate aftermarket is actually appended to the mechanism and measures at most a negligible size of remaining mutually beneficial gains. Methodological requirements for an appropriate aftermarket are specified. A first demonstration observes more frequent and ex-ante larger behavioral inefficiencies in second- than in first-price auctions. A simple field demonstration indicates when a public-good increase can be observed to cover marginal cost to subjects’ mutual benefit, without knowing valuations. A wide variety of empirical economic-policy studies can utilize this methodology to observe comparative evidence of alternative policies’ allocative efficiency shortfalls.
This is an updated and extended version of WP 14-05, with a new title.