A Dynamic Mechanism and Surplus Extraction Under Ambiguity
AbstractIn 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Birkbeck, Department of Economics, Mathematics & Statistics in its series Birkbeck Working Papers in Economics and Finance with number 0716.
Date of creation: Sep 2007
Date of revision:
Contact details of provider:
Postal: Malet Street, London WC1E 7HX, UK
Phone: 44-20- 76316429
Fax: 44-20- 76316416
Web page: http://www.ems.bbk.ac.uk/
Other versions of this item:
- 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.
- Subir Bose & Arup Daripa, 2008. "A Dynamic Mechanism and Surplus Extraction Under Ambiguity," Discussion Papers in Economics 08/24, Department of Economics, University of Leicester.
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gilboa Itzhak & Schmeidler David, 1993.
"Updating Ambiguous Beliefs,"
Journal of Economic Theory,
Elsevier, vol. 59(1), pages 33-49, February.
- Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006.
"Dynamic Variational Preferences,"
Carlo Alberto Notebooks
1, Collegio Carlo Alberto.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Larry G. Epstein & Martin Schneider, 2001.
RCER Working Papers
485, University of Rochester - Center for Economic Research (RCER).
- 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.
- John G. Riley & William Samuelson, 1979.
UCLA Economics Working Papers
152, UCLA Department of Economics.
- Crawford, Vincent P., 1990. "Equilibrium without independence," Journal of Economic Theory, Elsevier, vol. 50(1), pages 127-154, February.
- Bose, Subir & Ozdenoren, Emre & Pape, Andreas, 2006.
"Optimal auctions with ambiguity,"
Econometric Society, vol. 1(4), pages 411-438, December.
- Andreas Pape & Subir Bose & Emre Ozdenoren, 2004. "Optimal auctions with ambiguity," Econometric Society 2004 North American Summer Meetings 609, Econometric Society.
- Robert, Jacques, 1991. "Continuity in auction design," Journal of Economic Theory, Elsevier, vol. 55(1), pages 169-179, October.
- Matthews, Steven A., 1983.
"Selling to risk averse buyers with unobservable tastes,"
Journal of Economic Theory,
Elsevier, vol. 30(2), pages 370-400, August.
- Steven A. Matthews, 1981. "Selling to Risk Averse Buyers with Unobservable Tastes," Discussion Papers 480S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
- Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2006.
"Recursive Smooth Ambiguity Preferences,"
Carlo Alberto Notebooks
17, Collegio Carlo Alberto, revised 2008.
- Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
- Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2004. "Search and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 119(2), pages 299-333, December.
- Sujoy Mukerji & Jean-Marc Tallon, 2002.
"Ambiguity Aversion and the Absence of Wage Indexation,"
Economics Series Working Papers
111, University of Oxford, Department of Economics.
- 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.
- Jean-Marc Tallon & Sujoy Mukerji, 2004. "Ambiguity aversion and the absence of wage indexation," UniversitÃ© Paris1 PanthÃ©on-Sorbonne (Post-Print and Working Papers) halshs-00174562, HAL.
- Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
- McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
- Mukerji, S., 1997.
"Ambiguity aversion and incompleteness of contractual form,"
Discussion Paper Series In Economics And Econometrics
9715, Economics Division, School of Social Sciences, University of Southampton.
- Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
- 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.
- Zengjing Chen & Larry G. Epstein, 2000.
"Ambiguity, risk and asset returns in continuous time,"
RCER Working Papers
474, University of Rochester - Center for Economic Research (RCER).
- Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
- Cesaltina Pacheco Pires, 2002. "A Rule For Updating Ambiguous Beliefs," Theory and Decision, Springer, vol. 53(2), pages 137-152, September.
- Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
- Volij, Oscar, 2002. "Payoff equivalence in sealed bid auctions and the dual theory of choice under risk," Economics Letters, Elsevier, vol. 76(2), pages 231-237, July.
- J. Riley & E. Maskin, 1981.
"Optimal Auctions with Risk Averse Buyers,"
311, Massachusetts Institute of Technology (MIT), Department of Economics.
- Karni, Edi & Safra, Zvi, 1986. "Vickrey auctions in the theory of expected utility with rank-dependent probabilities," Economics Letters, Elsevier, vol. 20(1), pages 15-18.
- Kin Chung Lo, 1998. "Sealed bid auctions with uncertainty averse bidders," Economic Theory, Springer, vol. 12(1), pages 1-20.
- Subir Bose & Suresh Mutuswami, 2012. "Industry Dynamics and Indeterminacy in an OLG Economy with Endogenous Occupational Choice," Discussion Papers in Economics 12/10, Department of Economics, University of Leicester.
- 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.
- Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- 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.
- 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.
- 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.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.