Sellers with Misspecified Models

Kristóf Madarász and Andrea Prat

The Review of Economic Studies, 2017, vol. 84, issue 2, 790-815

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
References: Add references at CitEc
Citations: View citations in EconPapers (15)

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