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Ambiguous beliefs and mechanism design

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  • Bodoh-Creed, Aaron L.

Abstract

This paper develops a payoff equivalence theorem for mechanisms with ambiguity averse participants with preferences of the Maxmin Expected Utility (MEU) form (Gilboa and Schmeidler, 1989). We use our payoff equivalence result to explicitly characterize the revenue maximizing private value auction mechanism for agents with arbitrary forms of ambiguous beliefs. We also show that the revenue ranking between first and second price auctions is sensitive to the form of ambiguity aversion. Our payoff equivalence techniques allow us to study the constrained efficient, budget balanced bilateral trade mechanism and show that increased ambiguity improves the efficiency of the mechanism. In addition, we characterize the revenue maximizing, efficient bilateral trade mechanism and show that heightened ambiguity lowers ex ante budget deficits.

Suggested Citation

  • Bodoh-Creed, Aaron L., 2012. "Ambiguous beliefs and mechanism design," Games and Economic Behavior, Elsevier, vol. 75(2), pages 518-537.
  • Handle: RePEc:eee:gamebe:v:75:y:2012:i:2:p:518-537
    DOI: 10.1016/j.geb.2012.03.002
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:jetheo:v:171:y:2017:i:c:p:64-100 is not listed on IDEAS
    2. Lang, Matthias & Wambach, Achim, 2013. "The fog of fraud – Mitigating fraud by strategic ambiguity," Games and Economic Behavior, Elsevier, vol. 81(C), pages 255-275.
    3. Bierbrauer, Felix & Netzer, Nick, 2016. "Mechanism design and intentions," Journal of Economic Theory, Elsevier, vol. 163(C), pages 557-603.
    4. repec:spr:etbull:v:2:y:2014:i:2:d:10.1007_s40505-014-0037-5 is not listed on IDEAS
    5. 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.
    6. He, Wei & Yannelis, Nicholas C., 2015. "Equilibrium theory under ambiguity," Journal of Mathematical Economics, Elsevier, vol. 61(C), pages 86-95.
    7. Gaurab Aryal & Dong-Hyuk Kim, 2013. "Emprical Relevance of Ambiguity in First Price Auction Models," ANU Working Papers in Economics and Econometrics 2013-607, Australian National University, College of Business and Economics, School of Economics.
    8. Wolitzky, Alexander, 2016. "Mechanism design with maxmin agents: theory and an application to bilateral trade," Theoretical Economics, Econometric Society, vol. 11(3), September.
    9. Subir Bose & Suresh Mutuswami, 2012. "Bilateral Bargaining in an Ambiguous Environment," Discussion Papers in Economics 12/10, Department of Economics, University of Leicester.
    10. Giraud, Raphaël & Thomas, Lionel, 2017. "Ambiguity, optimism, and pessimism in adverse selection models," Journal of Economic Theory, Elsevier, vol. 171(C), pages 64-100.
    11. Nenad Kos & Matthias Messner, 2015. "Selling to the Mean," CESifo Working Paper Series 5443, CESifo Group Munich.
    12. Luciano I. Castro & Zhiwei Liu & Nicholas C. Yannelis, 2017. "Ambiguous implementation: the partition model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(1), pages 233-261, January.
    13. Bartling, Björn & Netzer, Nick, 2016. "An externality-robust auction: Theory and experimental evidence," Games and Economic Behavior, Elsevier, vol. 97(C), pages 186-204.
    14. de Castro, Luciano I. & Liu, Zhiwei & Yannelis, Nicholas C., 2017. "Implementation under ambiguity," Games and Economic Behavior, Elsevier, vol. 101(C), pages 20-33.
    15. Auster, Sarah, 2018. "Robust contracting under common value uncertainty," Theoretical Economics, Econometric Society, vol. 13(1), January.
    16. Ellis, Andrew, 2016. "Condorcet meets Ellsberg," Theoretical Economics, Econometric Society, vol. 11(3), September.

    More about this item

    Keywords

    Ambiguity aversion; Mechanism design; Auction theory;

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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