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A Dynamic Mechanism and Surplus Extraction Under Ambiguity

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  • Subir Bose

    ()

  • Arup Daripa

Abstract

In the standard independent private 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 study the question of auction design in an IPV setting characterized by 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; 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 we consider 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.

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Bibliographic Info

Paper provided by Department of Economics, University of Leicester in its series Discussion Papers in Economics with number 08/24.

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Date of creation: Jul 2008
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Handle: RePEc:lec:leecon:08/24

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Keywords: Ambiguity Aversion; Epsilon Contamination; Modified Dutch Auction; Dynamic Mechanism; Surplus Extraction;

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Cited by:
  1. 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.
  2. 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.
  3. 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.
  4. Martin Szydlowski, 2012. "Ambiguity in Dynamic Contracts," Discussion Papers 1543, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  5. 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.
  6. 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.
  7. 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.

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