Behavioral Di ff erences between Direct and Indirect Mechanisms ∗ (preliminary draft) Yusufcan Masatlioglu New York University Neslihan Uler † New York University October 31, 2004 Abstract The Revelation Principle depends on a seemingly innocuous assumption that theoretically outcome-equivalent (TOE) 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 settled on the first-price sealed-bid auction as our indirect mechanism and then constructed TOE direct mechanisms. In contrast with what theory proposes, the subjects behaved significantly different under direct and indirect mechanisms. We established the following conclusions: (i) The revenue equivalence did not hold - the indirect mechanism generated higher revenue than the direct mechanisms, (ii)the subjects behaved as if they were less risk averse in the direct mechanisms, (iii)moreover, we observed behavioral differences across direct mechanisms. The main implication of these findings is that the Revelation Principle may not be ap- plicable and therefore, it may not be sufficient to focus on the direct mechanisms alone. 1 Introduction The well-known Revelation Principle states that for any equilibrium in a mechanism, there exists an incentive compatible direct mechanism in which truth telling strategy generates equivalent outcomes as the given equilibrium of the original mechanism. It suggests that, without loss of generality, a designer could restrict his/her attention to direct mechanisms ∗ We especially would like to thank Andrew Schotter for his guidance and help throughout the project. We also thank Alberto Bisin, Guillaume R. Frechette, Debraj Ray, seminar participants at New York University for very helpful comments, and C.V. Star Center for Applied Economics for financial support. Benjamin Chiao, Syngjoo Choi, Matthew Embrey, Basak Gunes, Alejandro Solis and Viktor Tsyrennikov offered useful suggestions. Any remaining errors are ours. † Corresponding author. Tel.: 1-212-998-8038 E-mail address: nu221@nyu.edu (N. Uler) 1