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    A dynamic mechanism and surplus extraction under ambiguity

    Bose, S. and Daripa, Arup (2007) A dynamic mechanism and surplus extraction under ambiguity. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    In the standard independent private values (IPV) model, each bidder’s beliefs about the values of any other bidder is represented by a unique prior. In this paper we relax this assumption and study the question of auction design in an IPV setting characterized by ambiguity: bidders have an imprecise knowledge of the distribution of values of others, and are faced with a set of priors. We also assume that their preferences exhibit ambiguity aversion. We show that a simple variation of a discrete Dutch auction can extract almost all surplus. This contrasts with optimal auctions under IPV without ambiguity as well as with optimal static auctions with ambiguity - in all of these, types other than the lowest participating type obtain a positive surplus. And, unlike the well-known Cremer-McLean mechanism, our modified Dutch mechanism satisfies limited liability. An important point of departure is that the modified Dutch mechanism we consider is dynamic rather than static, establishing that under ambiguity aversion–even when the setting is IPV in all other respects–a dynamic mechanism could have additional bite over its static counterparts.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: BWPEF 0716
    Keyword(s) / Subject(s): Ambiguity Aversion, Modified Dutch Auction, Surplus Extraction
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 26 Mar 2019 15:02
    Last Modified: 22 Jul 2020 01:52
    URI: https://eprints.bbk.ac.uk/id/eprint/26896

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