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Mechanism design with maxmin agents: theory and an application to bilateral trade

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  • Wolitzky, Alexander

    () (Department of Economics, MIT)

Abstract

This paper studies mechanism design when agents are maxmin expected utility maximizers. A first result gives a general necessary condition for a social choice rule to be implementable. The condition combines an inequality version of the standard envelope characterization of payoffs in quasilinear environments with an approach for relating agents' maxmin expected utilities to their objective expected utilities under any common prior. The condition is then applied to give an exact characterization of when efficient trade is possible in the bilateral trading problem of Myerson and Satterthwaite (1983), under the assumption that agents know little beyond each other's expected valuation of the good (which is the information structure that emerges when agents are uncertain about each other's ability to acquire information). Whenever efficient trade is possible, it may be implemented by a relatively simple double auction format. Sometimes, an extremely simple reference price rule can also implement efficient trade.

Suggested Citation

  • Wolitzky, Alexander, 2016. "Mechanism design with maxmin agents: theory and an application to bilateral trade," Theoretical Economics, Econometric Society, vol. 11(3), September.
  • Handle: RePEc:the:publsh:2089
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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. repec:eee:jetheo:v:176:y:2018:i:c:p:693-726 is not listed on IDEAS
    3. repec:eee:proeco:v:200:y:2018:i:c:p:50-67 is not listed on IDEAS
    4. Giraud, Raphaël & Thomas, Lionel, 2017. "Ambiguity, optimism, and pessimism in adverse selection models," Journal of Economic Theory, Elsevier, vol. 171(C), pages 64-100.
    5. Kneeland, Terri, 2017. "Mechanism design with level-k types: Theory and an application to bilateral trade," Discussion Papers, Research Unit: Economics of Change SP II 2017-303, WZB Berlin Social Science Center.
    6. Richard McLean & Andrew Postlewaite, 2018. "A Very Robust Auction Mechanism," PIER Working Paper Archive 18-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 16 Jan 2018.

    More about this item

    Keywords

    Mechanism design; maxmin; ambiguity aversion; bilateral trade; Myerson-Satterthwaite;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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