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Selling to a naive agent with two rationales

Author

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  • Debasis Mishra

    (Indian Statistical Institute, Delhi)

  • Kolagani Paramahamsa

    (Indian Statistical Institute, Delhi)

Abstract

A seller is selling an object to an agent who uses two rationales to compare pairs of outcomes - (allocation probability, transfer) pairs. Each rationale is generated by quasilinear preference over the outcome space, and hence, can be represented by a valuation. However, the agent faces a budget constraint when making decisions using the first rationale. The agent compares any pair of outcomes using his pair of valuations in a lexicographic manner: first, he compares using the valuation corresponding to the first rationale; then, he compares using the valuation corresponding to the second rationale if and only if the first rationale cannot compare (due to budget constraint). We show that the optimal mechanism is either a posted price mechanism or a mechanism involving a pair of posted prices (a menu of three outcomes). In the latter case, the optimal mechanism involves randomization and pools types in the middle

Suggested Citation

  • Debasis Mishra & Kolagani Paramahamsa, 2018. "Selling to a naive agent with two rationales," Discussion Papers 18-03, Indian Statistical Institute, Delhi.
    • Handle: RePEc:alo:isipdp:18-03
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    More about this item

    Keywords

    optimal mechanism; posted-price mechanism; lexicographic choice; multiple rationales; budget constraint;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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