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Mechanism design with ambiguous transfers: An analysis in finite dimensional naive type spaces

Huiyi Guo

Journal of Economic Theory, 2019, vol. 183, issue C, 76-105

Abstract: This paper introduces ambiguous transfers to the problems of full surplus extraction and implementation in finite dimensional naive type spaces. The mechanism designer commits to one transfer rule but informs agents of a set of potential ones. Without knowing the adopted transfer rule, agents are assumed to make decisions based on the worst-case expected payoffs. A key condition in this paper is the Beliefs Determine Preferences (BDP) property, which requires an agent to hold distinct beliefs about others' information under different types. We show that full surplus extraction can be guaranteed via ambiguous transfers if and only if the BDP property is satisfied by all agents. When agents' beliefs can be generated by a common prior, all efficient allocations are implementable via individually rational and budget-balanced mechanisms with ambiguous transfers if and only if the BDP property holds for all agents. This necessary and sufficient condition is weaker than those for full surplus extraction and implementation via Bayesian mechanisms. Therefore, ambiguous transfers may achieve first-best outcomes that are impossible under the standard approach. In particular, with ambiguous transfers, efficient allocations become implementable generically in two-agent problems, a result that does not hold under a Bayesian framework.

Keywords: Full surplus extraction; Bayesian (partial) implementation; Ambiguous transfers; Correlated beliefs; Individual rationality; Budget balance (search for similar items in EconPapers)
JEL-codes: C72 D81 D82 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:jetheo:v:183:y:2019:i:c:p:76-105