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A Dynamic Mechanism and Surplus Extraction Under Ambiguity

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  • Subir Bose
  • Arup Daripa

    (Department of Economics, Mathematics & Statistics, Birkbeck)

Abstract

In the standardindependentprivate values (IPV)model, each bidder’s beliefs about the values of any other bidder is represented by a unique prior. In this paper we relax this assumption and studythe question of auction design in an IPV setting characterizedby ambiguity: bidders have an imprecise knowledge of the distribution of values of others, and are faced with a set of priors. We also assume that their preferences exhibit ambiguity aversion. 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 allofthese, types other than the lowestparticipatingtype obtain a positive surplus. And,unlike the well-known Cremer-McLean mechanism, our modifiedDutch mechanism satisfies limited liability. An important point of departure is that the modified Dutch mechanism we consider is dynamic rather than static, establishing that under ambiguity aversion–even when the settingis IPV in all other respects–a dynamic mechanism could have additional bite over its static counterparts.

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Bibliographic Info

Paper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0716.

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Date of creation: Sep 2007
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Handle: RePEc:bbk:bbkefp:0716

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Keywords: Ambiguity Aversion; Modified Dutch Auction; Surplus Extraction;

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References

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  1. Karni, Edi & Safra, Zvi, 1989. "Dynamic Consistency, Revelations in Auctions and the Structure of Preferences," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 421-33, July.
  2. Volij, Oscar, 2002. "Payoff Equivalence in Sealed Bid Auctions and the Dual Theory of Choice Under Risk," Staff General Research Papers 10129, Iowa State University, Department of Economics.
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  8. Maskin, Eric S & Riley, John G, 1984. "Optimal Auctions with Risk Averse Buyers," Econometrica, Econometric Society, vol. 52(6), pages 1473-1518, November.
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  18. Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
  19. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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Citations

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Cited by:
  1. 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.
  2. Subir Bose & Suresh Mutuswami, 2012. "Bilateral Bargaining in an Ambiguous Environment," Discussion Papers in Economics 12/10, Department of Economics, University of Leicester.
  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. Marie-Louise Vierø, 2006. "Contracting in Vague Environments," Working Papers 1106, Queen's University, Department of Economics.
  5. 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.
  6. 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.
  7. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. 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.

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