Behavioral Differences between Direct and Indirect Mechanisms: Evidence from First Price Auctions∗

The Revelation Principle depends on a seemingly innocuous assumption that theoretically outcome-equivalent (TOE) direct and indirect mechanisms are behaviorally equivalent as well. However, this strong assertion has not yet been tested in previous experimental studies. In this paper, we aim to fill this gap. We use the first-price sealed-bid auction as our indirect mechanism and construct corresponding TOE direct mechanisms. In contrast with what theory predicts, subjects behave significantly differently under direct and indirect mechanisms. We establish the following conclusions: (i) The revenue equivalence does not hold the indirect mechanism generated higher revenue than the direct mechanisms, (ii) subjects behaved as if they were less risk averse in the direct mechanisms, (iii) moreover, we observed different bids across direct mechanisms. We show that a referencedependent model explains the behavioral differences. The main implication of these findings is that the Revelation Principle may not be applicable and therefore, it may not be sufficient to focus on the direct mechanisms alone.