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Robust contracting under common value uncertainty

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Listed:
  • Auster, Sarah

    (Department of Decision Sciences and IGIER, Bocconi University)

Abstract

A buyer makes an offer to a privately informed seller for a good of uncertain quality. Quality determines both the seller's valuation and the buyer's valuation and the buyer evaluates each contract according to its worst-case performance over a set of probability distributions. The paper demonstrates that the contract that maximizes the minimum payoff over all possible probability distributions of quality is a screening menu that separates all types, whereas the optimal contract for any given probability distribution is a posted price, which induces bunching. Using the ϵ-contamination model, according to which the buyer's utility is a weighted average of his single prior expected utility and the worst-case scenario, the analysis further shows that for intermediate degrees of confidence the optimal mechanism combines features of both of these contracts.

Suggested Citation

  • Auster, Sarah, 2018. "Robust contracting under common value uncertainty," Theoretical Economics, Econometric Society, vol. 13(1), January.
    • Handle: RePEc:the:publsh:2385
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    References listed on IDEAS

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    6. Suzdaltsev, Alex, 2022. "Distributionally robust pricing in independent private value auctions," Journal of Economic Theory, Elsevier, vol. 206(C).
    7. Sosung Baik & Sung-Ha Hwang, 2021. "Auction design with ambiguity: Optimality of the first-price and all-pay auctions," Papers 2110.08563, arXiv.org.
    8. Wanchang Zhang, 2021. "Random Double Auction: A Robust Bilateral Trading Mechanism," Papers 2105.05427, arXiv.org, revised May 2022.
    9. Julio Backhoff-Veraguas & Patrick Beissner & Ulrich Horst, 2022. "Robust contracting in general contract spaces," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(4), pages 917-945, June.
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    More about this item

    Keywords

    Ambiguity aversion; optimal contracting; lemons problem;
    All these keywords.

    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
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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