The Design of Ambiguous Mechanisms

53 Pages Posted: 15 Jul 2012 Last revised: 19 Aug 2014

See all articles by Alfredo Di Tillio

Alfredo Di Tillio

Bocconi University - Department of Economics

Nenad Kos

Bocconi University - Department of Economics

Matthias Messner

Bocconi University - Department of Economics; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Date Written: July 26, 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: C72, D44, D82

Suggested Citation

Di Tillio, Alfredo and Kos, Nenad and Messner, Matthias, The Design of Ambiguous Mechanisms (July 26, 2014). Available at SSRN: https://ssrn.com/abstract=2106097 or http://dx.doi.org/10.2139/ssrn.2106097

Alfredo Di Tillio

Bocconi University - Department of Economics ( email )

Milan
Italy

HOME PAGE: http://mypage.unibocconi.eu/alfredoditillio

Nenad Kos

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Matthias Messner (Contact Author)

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3320 (Phone)
+39 02 5836 3332 (Fax)

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