Uncertainty in Mechanism Design

61 Pages Posted: 18 Feb 2021

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: January 28, 2021

Abstract

This paper studies the design of mechanisms that are robust to misspecification. We introduce a novel notion of robustness that connects a variety of disparate approaches and study its implications in a wide class of mechanism design problems. This notion is quantifiable, allowing us to formalize and answer comparative statics questions relating the nature and degree of misspecification to sharp predictions regarding features of feasible mechanisms. This notion also has a behavioral foundation which reflects the perception of ambiguity, thus allowing the degree of misspecification to emerge endogenously. In a number of standard settings, robustness to arbitrarily small amounts of misspecification generates a discontinuity in the set of feasible mechanisms and uniquely selects simple, ex post incentive compatible mechanisms such as second-price auctions. Robustness also sheds light on the value of private information and the prevalence of full or virtual surplus extraction.

Keywords: mechanism design, robustness, model misspecification, ambiguity, surplus extraction

JEL Classification: D0, D5, D8, G1

Suggested Citation

Lopomo, Giuseppe and Rigotti, Luca and Shannon, Chris, Uncertainty in Mechanism Design (January 28, 2021). Available at SSRN: https://ssrn.com/abstract=3774581 or http://dx.doi.org/10.2139/ssrn.3774581

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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