Quasi-Robust Multiagent Contracts

A criticism of mechanism design theory is that the optimal mechanism designed for one environment can produce drastically different actions, outcomes, and payoffs in a second, even slightly different, environment. In this sense, the theoretically optimal mechanisms usually studied are not "robust." In order to study robust mechanisms while maintaining an optimal contracting approach, we study a multiagent model in which the contract must be designed before the environment is as well understood as is usually assumed. The particular model is of an auction setting. Our main result is that if the prior about the correlation in the agents' environments is diffuse enough, the optimal BayesianNash auction is a simple dominant strategy auction (a modified second-price auction) that completely ignores the correlation in the agents' environments. Why are [theoretical] mechanisms ... typically not used in practice ... Arguably, the answer has something to do with their lack of robustness. That is, intricate mechanisms may perform poorly in the "imperfect" world of reality--either because (i) there are flaws in the agents' reasoning; or because (ii) mistakes are made in the specification of the agents' preferences, knowledge, or situation (Moore, 1992).