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On the equivalence of optimal mechanisms with loss and disappointment aversion

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  • Benkert, Jean-Michel

Abstract

We consider a standard, quasi-linear mechanism design setting in which agents’ outcomes consist of a binary part and a transfer, thus encompassing applications such as auctions, bilateral trade or public good provision. We augment preferences by allowing for loss aversion (Kőszegi and Rabin, 2007) and disappointment aversion (Bell, 1985; Loomes and Sugden, 1986). While the preferences induced by these models only have a trivial intersection given by classical expected utility (Masatlioglu and Raymond, 2016), we show that the optimal mechanisms for the two types of preferences are equivalent across a broad range of problems and thus display a remarkable robustness.

Suggested Citation

  • Benkert, Jean-Michel, 2022. "On the equivalence of optimal mechanisms with loss and disappointment aversion," Economics Letters, Elsevier, vol. 214(C).
    • Handle: RePEc:eee:ecolet:v:214:y:2022:i:c:s0165176522000878
    DOI: 10.1016/j.econlet.2022.110428
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    1. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    2. Fabian Herweg & Daniel Muller & Philipp Weinschenk, 2010. "Binary Payment Schemes: Moral Hazard and Loss Aversion," American Economic Review, American Economic Association, vol. 100(5), pages 2451-2477, December.
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    4. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    5. Dirk Bergemann & Stephen Morris, 2012. "Robust Mechanism Design," World Scientific Book Chapters, in: Robust Mechanism Design The Role of Private Information and Higher Order Beliefs, chapter 2, pages 49-96, World Scientific Publishing Co. Pte. Ltd..
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    9. Roland Eisenhuth, 2019. "Reference-dependent mechanism design," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(1), pages 77-103, May.
    10. Jean-Michel Benkert, 2015. "Bilateral trade with loss-averse agents," ECON - Working Papers 188, Department of Economics - University of Zurich, revised Jul 2022.
    11. Ran Spiegler, 2012. "Monopoly pricing when consumers are antagonized by unexpected price increases: a “cover version” of the Heidhues–Kőszegi–Rabin model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 51(3), pages 695-711, November.
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    1. Jean-Michel Benkert, 2015. "Bilateral trade with loss-averse agents," ECON - Working Papers 188, Department of Economics - University of Zurich, revised Jul 2022.

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    More about this item

    Keywords

    Mechanism design; Robustness; Loss aversion; Disappointment aversion;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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