The Design of Ambiguous Mechanisms
53 Pages Posted: 15 Jul 2012 Last revised: 19 Aug 2014
Date Written: July 26, 2014
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: Suggested Citation