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Sellers with misspecified models

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

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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: 26 Aug 2021 23:16
URI: http://eprints.lse.ac.uk/id/eprint/87271

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