A Dynamic Mechanism and Surplus Extraction Under Ambiguity
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.
|Date of creation:||Jul 2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
More information through EDIRC
|Order Information:|| Web: http://www2.le.ac.uk/departments/economics/research/discussion-papers Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mukerji, S., 1997.
"Ambiguity aversion and incompleteness of contractual form,"
Discussion Paper Series In Economics And Econometrics
9715, Economics Division, School of Social Sciences, University of Southampton.
- Mukerji, Sujoy, 1998. "Ambiguity Aversion and Incompleteness of Contractual Form," American Economic Review, American Economic Association, vol. 88(5), pages 1207-31, December.
- Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2004. "Search and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 119(2), pages 299-333, December.
- Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
- Zengjing Chen & Larry G. Epstein, 2000.
"Ambiguity, risk and asset returns in continuous time,"
RCER Working Papers
474, University of Rochester - Center for Economic Research (RCER).
- Zengjing Chen & Larry Epstein, 2002. "Ambiguity, Risk, and Asset Returns in Continuous Time," Econometrica, Econometric Society, vol. 70(4), pages 1403-1443, July.
- Larry G. Epstein & Martin Schneider, 2001.
RCER Working Papers
485, University of Rochester - Center for Economic Research (RCER).
- Jean-Marc Tallon & Sujoy Mukerji, 2004.
"Ambiguity aversion and the absence of wage indexation,"
Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers)
- Mukerji, Sujoy & Tallon, Jean-Marc, 2004. "Ambiguity aversion and the absence of wage indexation," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 653-670, April.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Karni, Edi & Safra, Zvi, 1986. "Vickrey auctions in the theory of expected utility with rank-dependent probabilities," Economics Letters, Elsevier, vol. 20(1), pages 15-18.
- John G. Riley & William Samuelson, 1979.
UCLA Economics Working Papers
152, UCLA Department of Economics.
- Crawford, Vincent P., 1990. "Equilibrium without independence," Journal of Economic Theory, Elsevier, vol. 50(1), pages 127-154, February.
- Bose, Subir & Ozdenoren, Emre & Pape, Andreas, 2006.
"Optimal auctions with ambiguity,"
Econometric Society, vol. 1(4), pages 411-438, December.
- Andreas Pape & Subir Bose & Emre Ozdenoren, 2004. "Optimal auctions with ambiguity," Econometric Society 2004 North American Summer Meetings 609, Econometric Society.
- Volij, Oscar, 2002.
"Payoff Equivalence in Sealed Bid Auctions and the Dual Theory of Choice Under Risk,"
Staff General Research Papers
10129, Iowa State University, Department of Economics.
- Volij, Oscar, 2002. "Payoff equivalence in sealed bid auctions and the dual theory of choice under risk," Economics Letters, Elsevier, vol. 76(2), pages 231-237, July.
- Fabio Maccheroni & Massimo Marinacci & Aldo Rustichini, 2006.
"Dynamic Variational Preferences,"
Carlo Alberto Notebooks
1, Collegio Carlo Alberto.
- Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
- Kin Chung Lo, 1998. "Sealed bid auctions with uncertainty averse bidders," Economic Theory, Springer, vol. 12(1), pages 1-20.
- Maskin, Eric S & Riley, John G, 1984.
"Optimal Auctions with Risk Averse Buyers,"
Econometric Society, vol. 52(6), pages 1473-1518, November.
- Karni, Edi & Safra, Zvi, 1989. "Dynamic Consistency, Revelations in Auctions and the Structure of Preferences," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 421-33, July.
- Camerer, Colin & Weber, Martin, 1992. " Recent Developments in Modeling Preferences: Uncertainty and Ambiguity," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 325-70, October.
- Steven A. Matthews, 1981.
"Selling to Risk Averse Buyers with Unobservable Tastes,"
480S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Matthews, Steven A., 1983. "Selling to risk averse buyers with unobservable tastes," Journal of Economic Theory, Elsevier, vol. 30(2), pages 370-400, August.
- Klibanoff, Peter & Marinacci, Massimo & Mukerji, Sujoy, 2009.
"Recursive smooth ambiguity preferences,"
Journal of Economic Theory,
Elsevier, vol. 144(3), pages 930-976, May.
- Robert, Jacques, 1991. "Continuity in auction design," Journal of Economic Theory, Elsevier, vol. 55(1), pages 169-179, October.
- Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
- Gilboa Itzhak & Schmeidler David, 1993.
"Updating Ambiguous Beliefs,"
Journal of Economic Theory,
Elsevier, vol. 59(1), pages 33-49, February.
- Cesaltina Pacheco Pires, 2002. "A Rule For Updating Ambiguous Beliefs," Theory and Decision, Springer, vol. 53(2), pages 137-152, September.
- McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
When requesting a correction, please mention this item's handle: RePEc:lec:leecon:08/24. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mrs. Alexandra Mazzuoccolo)
If references are entirely missing, you can add them using this form.