Ambiguous beliefs and mechanism design

This paper develops a payoff equivalence theorem for mechanisms with ambiguity averse participants with preferences of the Maxmin Expected Utility (MEU) form (Gilboa and Schmeidler [8]). We use our payoff equivalence result to explicitly characterize the revenue maximizing private value auction mechanism for agents with arbitrary forms of ambiguous beliefs. We also show that the revenue ranking between first and second price auctions is sensitive to the form of ambiguity aversion. Our payoff equivalence techniques allow us to study the constrained efficient, budget balanced bilateral trade mechanism and show that increased ambiguity improves the efficiency of the mechanism. In addition, we characterize the revenue maximizing, efficient bilateral trade mechanism and show that heightened ambiguity lowers ex ante budget deficits.