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Screening with an Approximate Type Space

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  • Prat, Andrea
  • Madarász, Kristóf

Abstract

We re-visit the single-agent mechanism design problem with quasilinear preferences, but we assume that the principal knowingly operates on the basis of only an approximate type space rather than the (potentially complex) truth. We propose a two-step scheme, the profit-participation mechanism, whereby: (i) the principal `takes the model seriously' and computes the optimal menu for the approximate type space; (ii) but she discounts the price of each allocation proportionally to the profit that the allocation would yield in the approximate model. We characterize the bound to the profit loss and show that it vanishes smoothly as the distance between the approximate type space and the true type space converges to zero. Instead, we show that it is not a valid approximation to simply act as if the model was correct.

Suggested Citation

  • Prat, Andrea & Madarász, Kristóf, 2010. "Screening with an Approximate Type Space," CEPR Discussion Papers 7900, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7900
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    Cited by:

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    2. Sylvain Chassang & Gerard Padró i Miquel, 2014. "Corruption, Intimidation, and Whistle-blowing: a Theory of Inference from Unverifiable Reports," NBER Working Papers 20315, National Bureau of Economic Research, Inc.
    3. Xavier Gabaix, 2014. "A Sparsity-Based Model of Bounded Rationality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1661-1710.
    4. L. Elisa Celis & Gregory Lewis & Markus Mobius & Hamid Nazerzadeh, 2014. "Buy-It-Now or Take-a-Chance: Price Discrimination Through Randomized Auctions," Management Science, INFORMS, vol. 60(12), pages 2927-2948, December.
    5. Sylvain Chassang, 2013. "Calibrated Incentive Contracts," Econometrica, Econometric Society, vol. 81(5), pages 1935-1971, September.
    6. Kristóf Madarász & Andrea Prat, 2017. "Sellers with Misspecified Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(2), pages 790-815.
    7. Andrea Prat, 2018. "Media Power," Journal of Political Economy, University of Chicago Press, vol. 126(4), pages 1747-1783.
    8. Marco Battaglini & Rohit Lamba, 2012. "Optimal Dynamic Contracting," Working Papers 1431, Princeton University, Department of Economics, Econometric Research Program..
    9. Bergemann, Dirk & Yeh, Edmund & Zhang, Jinkun, 2021. "Nonlinear pricing with finite information," Games and Economic Behavior, Elsevier, vol. 130(C), pages 62-84.
    10. Sylvain Chassang, 2016. "Mostly Prior-Free Asset Allocation," Working Papers 077_2016, Princeton University, Department of Economics, Econometric Research Program..
    11. Prat, Andrea & Garicano, Luis, 2011. "Organizational Economics with Cognitive Costs," CEPR Discussion Papers 8372, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Computational complexity; Mechanism design; Model uncertainty; Nonlinear pricing; Screening;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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