Uncertainty and Robustness of Surplus Extraction
36 Pages Posted: 27 Nov 2018
Date Written: October 2018
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: Suggested Citation