Uncertainty and Robustness of Surplus Extraction

36 Pages Posted: 27 Nov 2018

See all articles by Giuseppe Lopomo

Giuseppe Lopomo

Fuqua School - Duke University; Duke University - Department of Economics

Luca Rigotti

University of Pittsburgh - Department of Economics

Chris Shannon

University of California, Berkeley - Department of Economics

Date Written: October 2018

Abstract

This paper studies a robust version of the classic surplus extraction problem, in which the designer knows only that the beliefs of each type belong to some set, and designs mechanisms that are suitable for all possible beliefs in that set. We derive necessary and sufficient conditions for full extraction in this setting, and show that these are natural set-valued analogues of the classic convex independence condition identified by Cremer and McLean (1985, 1988). We show that full extraction is neither generically possible nor generically impossible, in contrast to the standard setting in which full extraction is generic. When full extraction fails, we show that natural additional conditions can restrict both the nature of the contracts a designer can offer and the surplus the designer can obtain.

Keywords: surplus extraction, robustness, ambiguity, Knightian uncertainty

JEL Classification: D81, D82

Suggested Citation

Lopomo, Giuseppe and Rigotti, Luca and Shannon, Chris, Uncertainty and Robustness of Surplus Extraction (October 2018). Economic Research Initiatives at Duke (ERID) Working Paper Forthcoming. Available at SSRN: https://ssrn.com/abstract=3278068 or http://dx.doi.org/10.2139/ssrn.3278068

Giuseppe Lopomo

Fuqua School - Duke University ( email )

Box 90097
Durham, NC 27708-0097
United States
(919) 660-7820 (Phone)
(919) 660-7971 (Fax)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

Luca Rigotti

University of Pittsburgh - Department of Economics ( email )

4901 Wesley Posvar Hall
230 South Bouquet Street
Pittsburgh, PA 15260
United States

Chris Shannon (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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