The Design of Ambiguous Mechanisms
54 Pages Posted: 18 Sep 2014
Date Written: August 25, 2014
Abstract
This paper explores the sale of an object to an ambiguity averse buyer. We show that the seller can increase his profit by using an ambiguous mechanism. That is, the seller can benefit from hiding certain features of the mechanism that he has committed to from the agent. We then characterize the profit maximizing mechanisms for the seller and characterize the conditions under which the seller can gain by employing an ambiguous mechanism.
Keywords: optimal mechanism design, ambiguity aversion, incentive compatibility, individual rationality
JEL Classification: C720, D440, D820
Suggested Citation: Suggested Citation
Di Tillio, Alfredo and Kos, Nenad and Messner, Matthias, The Design of Ambiguous Mechanisms (August 25, 2014). CESifo Working Paper Series No. 4949, Available at SSRN: https://ssrn.com/abstract=2497284 or http://dx.doi.org/10.2139/ssrn.2497284
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