Cookies?
Library Header Image
LSE Research Online LSE Library Services

Sellers with misspecified models

Madarász, Kristóf and Prat, Andrea (2017) Sellers with misspecified models. Review of Economic Studies, 84 (2). pp. 790-815. ISSN 0034-6527

[img]
Preview
Text - Accepted Version
Download (460kB) | Preview
Identification Number: 10.1093/restud/rdw030

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
Sets: Departments > Management
Date Deposited: 19 Mar 2018 10:35
Last Modified: 11 Sep 2019 12:51
URI: http://eprints.lse.ac.uk/id/eprint/87271

Actions (login required)

View Item View Item

Downloads

Downloads per month over past year

View more statistics