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Bilateral Bargaining in an Ambiguous Environment

Author

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  • Subir Bose
  • Suresh Mutuswami

Abstract

We perturb the bilateral bargaining model by introducing small ambiguity (via the epsilon contamination model) about the agents' types. We assume that the preferences are characterized by ambiguity aversion (Gilboa-Schmeidler). The rest of the setup is exactly as in Myerson and Satterthwaite [10]. And we show that in this environment, it is possible to design a mechanism that generates almost-efficient trade. Crucially, the mechanism has to be extensive-form; standard (normal form) direct revelation mechanism can only generate outcome that is continuous with respect to the amount of ambiguity.

Suggested Citation

  • Subir Bose & Suresh Mutuswami, 2012. "Bilateral Bargaining in an Ambiguous Environment," Discussion Papers in Economics 12/10, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:12/10
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp12-10.pdf
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    References listed on IDEAS

    as
    1. , & , & ,, 2006. "Optimal auctions with ambiguity," Theoretical Economics, Econometric Society, vol. 1(4), pages 411-438, December.
    2. Bose, Subir & Daripa, Arup, 2009. "A dynamic mechanism and surplus extraction under ambiguity," Journal of Economic Theory, Elsevier, vol. 144(5), pages 2084-2114, September.
    3. Bodoh-Creed, Aaron L., 2012. "Ambiguous beliefs and mechanism design," Games and Economic Behavior, Elsevier, vol. 75(2), pages 518-537.
    4. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
    5. Cesaltina Pacheco Pires, 2002. "A Rule For Updating Ambiguous Beliefs," Theory and Decision, Springer, vol. 53(2), pages 137-152, September.
    6. ,, 2011. "Dynamic choice under ambiguity," Theoretical Economics, Econometric Society, vol. 6(3), September.
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    Cited by:

    1. Wolitzky, Alexander, 2016. "Mechanism design with maxmin agents: theory and an application to bilateral trade," Theoretical Economics, Econometric Society, vol. 11(3), September.
    2. Auster, Sarah, 2018. "Robust contracting under common value uncertainty," Theoretical Economics, Econometric Society, vol. 13(1), January.

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    More about this item

    Keywords

    Ambiguity Aversion; Mechanism Design; Bilateral Bargaining; Myerson Satterthwaite.;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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