Ambiguous mechanism in a single principal single agent context


Speaker:Dr Subir Bose, University of Leicester
Date: Friday 7 May 2010
Time: 16.30
Location: STC\B

Further details

In this paper, we study the issue of ambiguous mechanism in a single principal single agent context where the agent has ambiguity averse preferences. We first argue that unless there is some exogenous source of ambiguity it is not possible to have any meaningful concept of ambiguous mechanism that is consistent with the concept of equilibrium. We then show that when the agent does have some ambiguity about the principal (loosely speaking about the principal's type) then the principal can exploit it to construct mechanisms to obtain outcomes dramatically different from those in the standard unique prior expected utility framework. The specific application we consider is the bilateral bargaining setup a la Myerson Satterthwaite. As is known, the standard revelation principle is not applicable in many non-expected utility settings; nevertheless we construct a (indirect) mechanism that results in almost efficient trade (for almost all types). The crucial aspect of the mechanism is that it is an extensive form game; static or a-temporal mechanisms cannot achieve the same outcome. We compare our findings to those in the informed principal literature.