An extensive form solution to the adverse selection problem in principal/multi-agent environments

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An extensive form solution to the adverse selection problem in principal/multi-agent environments

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John Duggan () (Department of Political Science and Department of Economics, University of Rochester, Rochester, NY 14627, USA)

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John Duggan

Abstract

When agents have quasi-linear preferences, every incentive compatible social choice function can be implemented by a simple extensive form mechanism, even if agents are allowed to use mixed strategies. The second stage of the mechanism, which is used to elicit the agents' true preferences, is not reached in equilibrium; it gives agents strict dominant strategies, so equilibrium outcomes are not sensitive to agents' beliefs off the equilibrium path. This solves the multiple equilibrium problem of a principal facing several agents: the mechanism implements any solution to the principal's second best maximization problem. The specification of incentive compatibility constraints in the principal's problem presupposes a precise knowledge of the agents' beliefs. However, the above mechanism can be modified to implement the principal's second best (to within arbitrarily small perturbations of transfers), regardless of the agents' conditional beliefs.

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Article provided by Springer in its journal Review of Economic Design.

Volume (Year): 3 (1998)
Issue (Month): 2 ()
Pages: 167-191
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Handle: RePEc:spr:reecde:v:3:y:1998:i:2:p:167-191

Note: Received: 30 April 1997 / Accepted: 16 September 1997
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Related research
Keywords:

Find related papers by JEL classification:
D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy-Making and Implementation
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Joanne Roberts, 1999. "Implementing the Efficient Allocation of Pollution," Working Papers jorob-99-01, University of Toronto, Department of Economics. [Downloadable!]
Other versions:
- John Duggan & Joanne Roberts, 2002. "Implementing the Efficient Allocation of Pollution," American Economic Review, American Economic Association, vol. 92(4), pages 1070-1078, September. [Downloadable!] (restricted)

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