The Design of Ambiguous Mechanisms

54 Pages Posted: 18 Sep 2014

See all articles by Alfredo Di Tillio

Alfredo Di Tillio

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Nenad Kos

Bocconi University - Department of Economics

Matthias Messner

University of Cologne

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

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

Alfredo Di Tillio

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Nenad Kos

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Matthias Messner (Contact Author)

University of Cologne ( email )

Albertus Magnus Platz
Cologne, NRW 50923
Germany

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