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Two-agent collusion-proof implementation with correlation and arbitrage

Author

Listed:
  • Dawen Meng

    (Shanghai University of Finance and Economics and Key Laboratory of Mathematical Economics (SHUFE))

  • Guoqiang Tian

    (Texas A&M University)

  • Zhe Yang

    (Shanghai University of Finance and Economics and Key Laboratory of Mathematical Economics (SHUFE))

Abstract

This paper characterizes the optimal collusion-proof mechanism in a two-agent nonlinear pricing environment. Our model allows agents to have correlated types and to reallocate their total purchases among themselves. We show that, under strongly negative correlation, the coalition will, sometimes, be torn apart at no cost. Under positive or weakly negative correlations, however, the threat of collusion forces the principal to distort allocation away from the first-best level obtained without collusion. We also show that, in contrast to the result of Laffont and Martimort (Econometrica 68:309–342, 2000), when the correlation is almost perfectly positive, the possibility of arbitrage prevents the principal from approaching the first-best efficiency.

Suggested Citation

  • Dawen Meng & Guoqiang Tian & Zhe Yang, 2017. "Two-agent collusion-proof implementation with correlation and arbitrage," Review of Economic Design, Springer;Society for Economic Design, vol. 21(3), pages 177-229, September.
    • Handle: RePEc:spr:reecde:v:21:y:2017:i:3:d:10.1007_s10058-017-0204-x
    DOI: 10.1007/s10058-017-0204-x
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    References listed on IDEAS

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