Review of Economic Studies Vol. 84 No. 2 2016
Sellers with Misspecified Models
Abstract
Principals often operate on misspecified models of their agents’ preferences. When preferences are such that non-local incentive constraints may bind in the optimum, even slight misspecification of the preferences can lead to large and non-vanishing losses. Instead, we propose a two-step scheme whereby the principal: (1) identifies the model-optimal menu; and (2) modifies prices by offering to share with the agent a fixed proportion of the profit she would receive if an item were sold at the model-optimal price. We show that her loss is bounded and vanishes smoothly as the model converges to the truth. Finally, two-step mechanisms without a sharing rule like (2) will not yield a valid approximation.
- DOI
- 10.1093/restud/rdw030
- Volume
- 84
- Issue
- 2
- Pages
- rdw030
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref