Mechanism Design for Cumulative Prospect Theoretic Agents: A General Framework and the Revelation Principle

TL;DR

This paper explores mechanism design for agents with cumulative prospect theory preferences, revealing that the classical revelation principle does not hold and proposing a mediated mechanism framework to address this issue.

Contribution

It introduces a new framework called mediated mechanism design that restores the revelation principle for agents with CPT preferences, extending classical mechanism design theory.

Findings

Revelation principle fails under CPT preferences.

Mediated mechanism design restores the revelation principle for CPT agents.

Provides a foundation for designing mechanisms with non-EUT agents.

Abstract

This paper initiates a discussion of mechanism design when the participating agents exhibit preferences that deviate from expected utility theory (EUT). In particular, we consider mechanism design for systems where the agents are modeled as having cumulative prospect theory (CPT) preferences, which is a generalization of EUT preferences. We point out some of the key modifications needed in the theory of mechanism design that arise from agents having CPT preferences and some of the shortcomings of the classical mechanism design framework. In particular, we show that the revelation principle, which has traditionally played a fundamental role in mechanism design, does not continue to hold under CPT. We develop an appropriate framework that we call mediated mechanism design which allows us to recover the revelation principle for CPT agents. We conclude with some interesting directions for future work.