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A dynamic mechanism and surplus extraction under ambiguity

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  • Bose, Subir
  • Daripa, Arup

Abstract

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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 144 (2009)
Issue (Month): 5 (September)
Pages: 2084-2114

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Handle: RePEc:eee:jetheo:v:144:y:2009:i:5:p:2084-2114

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: Ambiguity aversion Epsilon contamination Modified Dutch auction Dynamic mechanism Surplus extraction Revelation principle;

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References

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Citations

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Cited by:
  1. Marie-Louise Vier�, 2012. "Contracting in Vague Environments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 104-30, May.
  2. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Ronald Stauber, 2013. "A Framework for Robustness to Ambiguity of Higher-Order Beliefs," ANU Working Papers in Economics and Econometrics 2013-602, Australian National University, College of Business and Economics, School of Economics.
  4. Bettina Klose & Paul Schweinzer, 2012. "Auctioning risk: The all-pay auction under mean-variance preferences," Discussion Papers 12/32, Department of Economics, University of York.
  5. Subir Bose & Suresh Mutuswami, 2012. "Bilateral Bargaining in an Ambiguous Environment," Discussion Papers in Economics 12/10, Department of Economics, University of Leicester.
  6. Alfredo Di Tillio & Nenad Kos & Matthias Messner, 2012. "The Design of Ambiguous Mechanisms," Working Papers 446, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  7. Bettina Klose & Paul Schweinzer, 2012. "Auctioning risk: The all-pay auction under mean-variance preferences," ECON - Working Papers 097, Department of Economics - University of Zurich.
  8. Gaurab Aryal & Ronald Stauber, 2013. "Trembles in Extensive Games with Ambiguity Averse Players," ANU Working Papers in Economics and Econometrics 2013-606, Australian National University, College of Business and Economics, School of Economics.

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