Bilateral Bargaining in an Ambiguous Environment

Subir Bose and Suresh Mutuswami

No 12/10, Discussion Papers in Economics from Division of Economics, School of Business, University of Leicester

Abstract: We perturb the bilateral bargaining model by introducing small ambiguity (via the epsilon contamination model) about the agents' types. We assume that the preferences are characterized by ambiguity aversion (Gilboa-Schmeidler). The rest of the setup is exactly as in Myerson and Satterthwaite [10]. And we show that in this environment, it is possible to design a mechanism that generates almost-efficient trade. Crucially, the mechanism has to be extensive-form; standard (normal form) direct revelation mechanism can only generate outcome that is continuous with respect to the amount of ambiguity.

Keywords: Ambiguity Aversion; Mechanism Design; Bilateral Bargaining; Myerson Satterthwaite. (search for similar items in EconPapers)
JEL-codes: C78 D8 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (2)

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