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Reference Dependent Mechanism Design (Autosaved)
Reference Dependent Mechanism Design (Autosaved)
Mechanism Design
Eisenhuth (2018)
Reference Dependent Utility
• Kanheman and Tversky (1979)
• Rabin (2007): reference point is endogenous
Eisenhuth (2018)
• Revenue maximizing mechanisms in the presence of agents who are
loss averse.
• Two models of reference dependence:
• One-dimensional (wide bracketing): agents evaluate gains and losses over the
entire risk neutral payoff.
• Two-dimensional (narrow bracketing): agents consider gains and losses
separately, in terms of receiving the object (allocation) and payment.
• Choice Acclimating Personal Equilibrium (CPE): The reference point is
determined endogenously as an equilibrium object and depends on
the mechanism played.
Model
• Preferences
• The narrowly bracketed specification of agents’ preferences
𝑢2 𝑐 𝑔 , 𝑐 𝑚 𝑟 𝑔 , 𝑟 𝑚 , 𝜃 = 𝜃𝑐 𝑔 + 𝑐 𝑚 + 𝜂 𝑔 𝜇 𝑔 𝜃 𝑐 𝑔 − 𝑟 𝑔 + 𝜂𝑚 𝜇𝑚 𝑐 𝑚 − 𝑟 𝑚
𝑈 𝐻|𝐺, 𝜃 = න න 𝑢(𝑐 𝑔 , 𝑐 𝑚 𝑟 𝑔 , 𝑟 𝑚 , 𝜃 𝑑𝐺 𝑟 𝑔 , 𝑟 𝑚 𝜃 𝑑𝐻 𝑐 𝑔 , 𝑐 𝑚 𝜃
𝑐 𝑔 ,𝑐 𝑚 𝑟 𝑔 ,𝑟 𝑚
• Definition 1: (Koszegi and Rabin (2007)) Conditional on the realization
of the type,𝜃, for any choice set, 𝐷, 𝐻 ∈ 𝐷 is an interim CPE if
Ω𝑖 𝜃𝑖 , 𝜃−𝑖
= 𝜂𝑚 𝜆𝑚 න ( 𝑇𝑖 𝜃𝑖 , 𝜃−𝑖 − 𝑇𝑖 𝜃𝑖 , 𝜃−𝑖 ′ )𝑑𝐹 𝜃−𝑖 ′ |𝜃𝑖
{𝜃−𝑖 ′ :𝑇𝑖 𝜃
𝑖 ,𝜃−𝑖 ′ <𝑇𝑖 𝜃
𝑖 ,𝜃−𝑖 }
Proof:
• The expected physical to the mechanism of an agent of type 𝜃𝑖 , is 𝑡𝑖 𝜃𝑖 = 𝜏𝑖 𝜃𝑖 −
𝜔𝑖 𝜃𝑖 , where
𝜔𝑖 𝜃𝑖 = 𝜃{ Ω𝑖 ( 𝜃𝑖 , 𝜃−𝑖 )𝑑𝐹 𝜃−𝑖 |𝜃𝑖
−𝑖 }
Subject to
Monotonicity of 𝛽𝑖
IR
𝜔𝑖 𝜃𝑖 ≥ 0
𝑞𝑖 𝜃𝑖 = න 𝑄𝑖 𝜃𝑖 , 𝜃−𝑖 𝑑𝐹 𝜃−𝑖 |𝜃𝑖
{𝜃−𝑖 }
𝛽𝑖 𝜃𝑖 = 𝑞𝑖 𝜃𝑖 (1 − Λ 𝑔 1 − 𝑞𝑖 𝜃𝑖 )
𝑄𝑖 𝜃𝑖 , 𝜃−𝑖 ∈ {0,1}
σ𝑁𝑖=1 𝑄𝑖 𝜃𝑖 , 𝜃−𝑖 ≤ 1, for all 𝑖, 𝜃𝑖 , 𝜃−𝑖
• By lemma 1, 𝜔𝑖 𝜃𝑖 ≥ 0 for all 𝑖, 𝜃𝑖 , which enters with a negative sign in
designer’s objective.
• Designer chooses 𝜔𝑖 𝜃𝑖 = 0 for all 𝑖, 𝜃𝑖 .
• Using integration by parts, designer’s problem can be written as
𝑁 𝜃𝑚𝑎𝑥 𝑁
1 − 𝐹(𝜃𝑖 )
𝑚𝑎𝑥{𝛽 ,𝑞 ,𝑄 ,𝑉 }𝑁 { න 𝛽𝑖 𝜃𝑖 (𝜃𝑖 − )𝑑𝐹 𝜃𝑖 − 𝑉𝑖 𝜃𝑚𝑖𝑛 𝜃𝑚𝑖𝑛 }
𝑖 𝑖 𝑖 𝑖 𝑖=1
𝜃𝑚𝑖𝑛 𝑓(𝜃𝑖 )
𝑖=1 𝑖=1
Subject to
Monotonicity of 𝛽𝑖
IR
𝑞𝑖 𝜃𝑖 = න 𝑄𝑖 𝜃𝑖 , 𝜃−𝑖 𝑑𝐹 𝜃−𝑖 |𝜃𝑖
{𝜃−𝑖 }
𝛽𝑖 𝜃𝑖 = 𝑞𝑖 𝜃𝑖 (1 − Λ 𝑔 1 − 𝑞𝑖 𝜃𝑖 )
𝑄𝑖 𝜃𝑖 , 𝜃−𝑖 ∈ {0,1}
σ𝑁𝑖=1 𝑄𝑖 𝜃𝑖 , 𝜃−𝑖 ≤ 1, for all 𝑖, 𝜃𝑖 , 𝜃−𝑖
1−𝐹(𝜃𝑖 )
• Define 𝜈 𝜃𝑖 = 𝜃𝑖 −
𝑓(𝜃𝑖 )
• Assumption 2: (Regularity) 𝜈 is strictly increasing in 𝜃𝑖 , for all 𝜃𝑖 .