Selling to a naive agent with two rationales

Debasis Mishra and Kolagani Paramahamsa

Discussion Papers from Indian Statistical Institute, Delhi

Abstract: A seller is selling an object to an agent who uses two rationales to compare pairs of outcomes - (allocation probability, transfer) pairs. Each rationale is generated by quasilinear preference over the outcome space, and hence, can be represented by a valuation. However, the agent faces a budget constraint when making decisions using the first rationale. The agent compares any pair of outcomes using his pair of valuations in a lexicographic manner: first, he compares using the valuation corresponding to the first rationale; then, he compares using the valuation corresponding to the second rationale if and only if the first rationale cannot compare (due to budget constraint). We show that the optimal mechanism is either a posted price mechanism or a mechanism involving a pair of posted prices (a menu of three outcomes). In the latter case, the optimal mechanism involves randomization and pools types in the middle

Keywords: optimal mechanism; posted-price mechanism; lexicographic choice; multiple rationales; budget constraint (search for similar items in EconPapers)
JEL-codes: D40 D82 D90 (search for similar items in EconPapers)
Pages: 77 pages
Date: 2018-03
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