This paper considers mechanism design problems in environments with ambiguitysensitive individuals. The novel idea is to introduce ambiguity in mechanisms so as to exploit the ambiguity sensitivity of individuals. We prove a revelation principle for the partial implementation of social choice functions by ambiguous mechanisms.We then revisit the classical monopolistic screening problem and show that ex-post full surplus extraction is possible, even when there is no ex-ante ambiguity.
We study dynamic pricing by a monopolist selling to buyers who learn from each other's purchases. The price posted in each period serves to extract rent from the current buyer, as well as to control the amount of information transmitted to future buyers. As information increases future rent extraction, the monopolist has an incentive to subsidize learning by charging a price that results in information revelation. Nonetheless, in the long run, the monopolist generally induces herding by either selling to all buyers or exiting the market.
We study the question of auction design in an IPV setting characterized by ambiguity. We assume that the preferences of agents exhibit ambiguity aversion; in particular, they are represented by the epsilon-contamination model. We show that a simple variation of a discrete Dutch auction can extract almost all surplus. This contrasts with optimal auctions under IPV without ambiguity as well as with optimal static auctions with ambiguity -in all of these, types other than the lowest participating type obtain a positive surplus. An important point of departure is that the modified Dutch mechanism is dynamic rather than static, establishing that under ambiguity aversion-even when the setting is IPV in all other respects-a dynamic mechanism can have additional bite over its static counterparts. A further general insight is that the standard revelation principle does not automatically extend to environments not characterized by subjective expected utility. 1 We thank the associate editor and two anonymous referees for their insightful comments. We also thank Ludovic Renou, the participants of Birmingham Summer Theory Workshop 08, and of RUD 08 at Oxford for questions and comments that helped clarify our exposition. We are grateful to Peter Klibanoff for many valuable and detailed comments. Finally, we thank Sujoy Mukerji. Several discussions with him in the course of the work shaped our understanding of many of the issues involved.
Emre Ozdenoren, Ennio Stacchetti, an anonymous referee, and an associate editor for insightful and extremely helpful comments. The usual disclaimer applies.
AbstractWe study the mechanism design problem when the principal can condition the agent's transfers on the realization of ex post signals that are correlated with the agents' types. Crémer and McLean (Econometrica, 53(1985) 345-361; 56(1988) 1247-1258, McAfee and Reny (Econometrica, 6(1992) 395-421), Riordan and Sappington (JET, 45(1988) 189-199) studied situations where either the signals are rich enough, or the conditional signal distributions and agents' payoffs are such that a mechanism can be designed to fully extract the surplus from every agent. In this paper, we study the optimal utilization of the signals when full surplus extraction may not be possible. We assume that the cardinality of the signal space is smaller than that of the type space and the Riordan and Sappington conditions do not always hold. We study the optimal ways to utilize the signals. For some tractable special cases, we investigate the optimal mechanism and the level of surplus that can be extracted, and identify the agent types who obtain rent.
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