Implementation in Weakly Undominated Strategies, with Applications to Auctions and Bilateral Trade

Yamashita, Takuro (2015) Implementation in Weakly Undominated Strategies, with Applications to Auctions and Bilateral Trade. Review of Economic Studies, 82 (3). pp. 1223-1246.

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Official URL: http://tse-fr.eu/pub/31935

Abstract

We study the mechanism design problem of guaranteeing desirable performances whenever agents are rational in the sense of not playing weakly dominated strategies. We first provide an upper bound for the best performance we can guarantee among all feasible mechanisms. The bound is represented as the maximized value of the designer's objective subject to the inequality version of the standard envelope incentive conditions. We then prove the bound to be tight under certain conditions on the designer's prior over the agents' pay-off types in auction and bilateral-trade applications. In private-value auction and bilateral trade, the optimal mechanisms (a second-price auction and posted-price mechanism, respectively) satisfy dominant-strategy incentive compatibility, the classical notion of “robust” mechanisms. In an interdependent-value auction, we find that a second-price auction is optimal in revenue with interdependent values, which is neither dominant-strategy nor ex post incentive compatible, but satisfies the novel incentive compatibility introduced in this analysis.

Item Type: Article
Language: English
Date: 2015
Refereed: Yes
Uncontrolled Keywords: Robust mechanism design, Robust implementation
JEL codes: D82 - Asymmetric and Private Information
D86 - Economics of Contract - Theory
Subjects: B- ECONOMIE ET FINANCE
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 04 May 2018 14:46
Last Modified: 04 May 2018 14:46
OAI ID: oai:tse-fr.eu:31935
URI: http://publications.ut-capitole.fr/id/eprint/25656

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