The Design of Ambiguous Mechanisms∗ Alfredo Di Tillio y Nenad Kos z Matthias Messner x Bocconi University, Bocconi University, Bocconi University, IGIER IGIER IGIER, CESifo July 26, 2014 Abstract This paper explores the sale of an object to an ambiguity averse buyer. We show that the seller can increase his profit by using an ambiguous mechanism. That is, the seller can benefit from hiding certain features of the mechanism that he has committed to from the agent. We then characterize the profit maximizing mechanisms for the seller and characterize the conditions under which the seller can gain by employing an ambiguous mechanism. JEL Code: C72, D44, D82. Keywords: Optimal mechanism design, Ambiguity aversion, Incentive compatibility, In- dividual rationality. ∗We thank the editor and three anonymous referees for their insightful and constructive comments that have helped us to greatly improve the paper. For helpful discussions and comments we also thank Simone Cerreia- Vioglio, Eddie Dekel, Georgy Egorov, Eduardo Faingold, Itzhak Gilboa, Matthew Jackson, Alessandro Lizzeri, George Mailath, Massimo Marinacci, Stephen Morris, Frank Riedel, Larry Samuelson, Martin Schneider, Ilya Segal, seminar participants at Northwestern University, Universitat Autonoma de Barcelona, Universitat Pompeu Fabra, Yale University, participants of UECE Lisbon 2011, Workshop on Ambiguity Bonn 2011, and Arne Ryde Workshop on Dynamic Princing: A Mechanism Design Perspective 2011. yDept. of Econ. & IGIER, Bocconi University; e-mail:
[email protected] zDept.