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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.

Suggested Citation

  • Bose, Subir & Daripa, Arup, 2009. "A dynamic mechanism and surplus extraction under ambiguity," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2084-2114, September.
    • Handle: RePEc:eee:jetheo:v:144:y:2009:i:5:p:2084-2114
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    More about this item

    Keywords

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

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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