Madarász, Kristóf 
ORCID: 0009-0008-8053-3937 and Prat, Andrea
(2017)
Sellers with misspecified models.
Review of Economic Studies, 84 (2).
790 - 815.
ISSN 0034-6527
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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.
| Item Type: | Article |
|---|---|
| Official URL: | https://academic.oup.com/restud |
| Additional Information: | © 2016 Oxford University Press |
| Divisions: | Management |
| Subjects: | H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management |
| JEL classification: | C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory D - Microeconomics > D4 - Market Structure and Pricing D - Microeconomics > D8 - Information, Knowledge, and Uncertainty |
| Date Deposited: | 19 Mar 2018 10:35 |
| Last Modified: | 01 Nov 2024 04:25 |
| URI: | http://eprints.lse.ac.uk/id/eprint/87271 |
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