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Ambiguous beliefs and mechanism design

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  • Bodoh-Creed, Aaron L.

Abstract

This paper develops a payoff equivalence theorem for mechanisms with ambiguity averse participants with preferences of the Maxmin Expected Utility (MEU) form (Gilboa and Schmeidler, 1989). We use our payoff equivalence result to explicitly characterize the revenue maximizing private value auction mechanism for agents with arbitrary forms of ambiguous beliefs. We also show that the revenue ranking between first and second price auctions is sensitive to the form of ambiguity aversion. Our payoff equivalence techniques allow us to study the constrained efficient, budget balanced bilateral trade mechanism and show that increased ambiguity improves the efficiency of the mechanism. In addition, we characterize the revenue maximizing, efficient bilateral trade mechanism and show that heightened ambiguity lowers ex ante budget deficits.

Suggested Citation

  • Bodoh-Creed, Aaron L., 2012. "Ambiguous beliefs and mechanism design," Games and Economic Behavior, Elsevier, vol. 75(2), pages 518-537.
    • Handle: RePEc:eee:gamebe:v:75:y:2012:i:2:p:518-537
    DOI: 10.1016/j.geb.2012.03.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Ambiguity aversion; Mechanism design; Auction theory;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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