Sellers with misspecified models

Kristóf Madarász and Andrea Prat

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Principals often operate on misspecified models of their agents’ preferences. When preferences are such that non-local incentive constraints may bind in the optimum, even slight misspecification of the preferences can lead to large and non-vanishing losses. Instead, we propose a two-step scheme whereby the principal: (1) identifies the model-optimal menu; and (2) modifies prices by offering to share with the agent a fixed proportion of the profit she would receive if an item were sold at the model-optimal price. We show that her loss is bounded and vanishes smoothly as the model converges to the truth. Finally, two-step mechanisms without a sharing rule like (2) will not yield a valid approximation.

Keywords: model uncertainty; robustness; complexity; mechanism design (search for similar items in EconPapers)
JEL-codes: C7 D4 D8 (search for similar items in EconPapers)
Date: 2017-04-01
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Citations: View citations in EconPapers (12)

Published in Review of Economic Studies, 1, April, 2017, 84(2), pp. 790 - 815. ISSN: 0034-6527

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Journal Article: Sellers with Misspecified Models (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:87271

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