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Mechanism Design with Endogenous Perception

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  • Benjamin Balzer
  • Benjamin Young

Abstract

We model endogenous perception of private information in single-agent screening problems, with potential evaluation errors. The agent's evaluation of their type depends on their cognitive state: either attentive (i.e., they correctly perceive their type) or inattentive (i.e., they might misperceive their type). The mechanism's incentives structure determines the agent's cognitive state via costly investment in cognition. We derive a general representation of attention incentives, show how they vary with the mechanism's allocation rule, and define a notion of accuracy of perception. In applications we showcase how perception both shapes and is shaped by the design of mechanisms.

Suggested Citation

  • Benjamin Balzer & Benjamin Young, 2024. "Mechanism Design with Endogenous Perception," Papers 2409.19853, arXiv.org, revised Oct 2024.
    • Handle: RePEc:arx:papers:2409.19853
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    References listed on IDEAS

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    1. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    2. Carbajal, Juan Carlos & Ely, Jeffrey C., 2016. "A model of price discrimination under loss aversion and state-contingent reference points," Theoretical Economics, Econometric Society, vol. 11(2), May.
    3. Alex Gershkov & Benny Moldovanu & Philipp Strack & Mengxi Zhang, 2022. "Optimal Auctions: Non-expected Utility and Constant Risk Aversion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2630-2662.
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