Screening with an Approximate Type Space

Andrea Prat and Madarász, Kristóf
Authors registered in the RePEc Author Service: Kristof Madarasz

No 7900, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We re-visit the single-agent mechanism design problem with quasilinear preferences, but we assume that the principal knowingly operates on the basis of only an approximate type space rather than the (potentially complex) truth. We propose a two-step scheme, the profit-participation mechanism, whereby: (i) the principal `takes the model seriously' and computes the optimal menu for the approximate type space; (ii) but she discounts the price of each allocation proportionally to the profit that the allocation would yield in the approximate model. We characterize the bound to the profit loss and show that it vanishes smoothly as the distance between the approximate type space and the true type space converges to zero. Instead, we show that it is not a valid approximation to simply act as if the model was correct.

Keywords: Computational complexity; Mechanism design; Model uncertainty; Nonlinear pricing; Screening (search for similar items in EconPapers)
JEL-codes: D82 (search for similar items in EconPapers)
Date: 2010-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Working Paper: Screening with an Approximate Type Space (2010)
Working Paper: Screening with an approximate type space (2010)
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