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Mechanism Design under Hidden Information by Risk-Averse Principals

This paper studies the effects of risk aversion on nonlinear pricing. It first develops a model of risk-averse principal, based on Mussa and Rosen (1978), and finds the equilibrium allocation increases as the principal becomes more risk averse and approaches the efficient level if the principal is sufficiently risk averse. Then the model is extended to allow for random participation. It is found that allocation moves towards the efficient level as the monopolistic principal becomes more risk averse. For duopoly, costbased two-part tariff is optimal in full participation equilibrium and the fixed fee component monotonically decreaases and converges to zero when the coefficient of absolute risk-aversion of the principals tends to infinity.