Screening with an Approximate Type Space

Kristóf Madarász and Andrea Prat

STICERD - Theoretical Economics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: We re-visit the single-agent mechanism design problem with quasi-linear 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.

Date: 2010-06
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Citations: View citations in EconPapers (12)

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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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Persistent link: https://EconPapers.repec.org/RePEc:cep:stitep:548

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