Knowledge-Based Mechanisms

Abstract: We study robust mechanisms when the designer possesses a Bayesian belief over some components of agents' private information but faces ambiguity over others. The designer evaluates mechanisms by their worst-case performance over all joint distributions consistent with her belief over the Bayesian components. The framework encompasses settings such as multidimensional delegation in which a principal knows the distribution of the state but not the agent's preferences (e.g., his tradeoffs across dimensions), screening in which a seller only has misspecified estimates of buyer preferences, and auction and voting design when agents' beliefs about each other are ambiguous to the designer. We provide conditions under which a \emph{knowledge-based} mechanism---one that conditions only on the Bayesian components but not the ambiguous ones---is robustly optimal. Our results unify earlier work across distinct economic environments and uncover new applications.