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On the equivalence of optimal mechanisms with loss and disappointment aversion

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  • Benkert, Jean-Michel

Abstract

We consider a standard, quasi-linear mechanism design setting in which agents’ outcomes consist of a binary part and a transfer, thus encompassing applications such as auctions, bilateral trade or public good provision. We augment preferences by allowing for loss aversion (Kőszegi and Rabin, 2007) and disappointment aversion (Bell, 1985; Loomes and Sugden, 1986). While the preferences induced by these models only have a trivial intersection given by classical expected utility (Masatlioglu and Raymond, 2016), we show that the optimal mechanisms for the two types of preferences are equivalent across a broad range of problems and thus display a remarkable robustness.

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  • Benkert, Jean-Michel, 2022. "On the equivalence of optimal mechanisms with loss and disappointment aversion," Economics Letters, Elsevier, vol. 214(C).
    • Handle: RePEc:eee:ecolet:v:214:y:2022:i:c:s0165176522000878
    DOI: 10.1016/j.econlet.2022.110428
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    1. Jean-Michel Benkert, 2022. "Bilateral Trade with Loss-Averse Agents," Diskussionsschriften dp2203, Universitaet Bern, Departement Volkswirtschaft.

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    More about this item

    Keywords

    Mechanism design; Robustness; Loss aversion; Disappointment aversion;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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