Abstract

We analyze the surplus extraction problem in a mechanism design setting with consideration sets. We study a bounded rationality version of a general mechanism design environment with correlation in which the agent evaluates only a subset of types as possible deviations. We call these subsets the agent's consideration sets. We identify the inverse consideration sets as the key elements that determine whether full extraction is feasible in this setting and characterize the conditions beliefs need to satisfy to guarantee full surplus extraction. These conditions require the beliefs of each type to be separated from the beliefs of types in his inverse consideration set only. This relaxes the independence condition in Cr & eacute;mer and McLean (1988), which remains sufficient in our setting. Finally, we discuss some applications and limitations of our model.