Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure
AbstractThis paper examines the problem of how to design incentive-compatible mechanisms in environments in which the agents' private information evolves stochastically over time and in which decisions have to be made in each period. The environments we consider are fairly general in that the agents' types are allowed to evolve in a non-Markov way, decisions are allowed to affect the type distributions and payoffs are not restricted to be separable over time. Our first result is the characterization of a dynamic payoff formula that describes the evolution of the agents' equilibrium payoffs in an incentive-compatible mechanism. The formula summarizes all local first-order conditions taking into account how current information affects the dynamics of expected payoffs. The formula generalizes the familiar envelope condition from static mechanism design: the key difference is that a variation in the current types now impacts payoffs in all subsequent periods both directly and through the effect on the distributions of future types. First, we identify assumptions on the primitive environment that guarantee that our dynamic payoff formula is a necessary condition for incentive compatibility. Next, we specialize this formula to quasi-linear environments and show how it permits one to establish a dynamic "revenue-equivalence" result and to construct a formula for dynamic virtual surplus which is instrumental for the design of optimal mechanisms. We then turn to the characterization of sufficient conditions for incentive compatibility. Lastly, we show how our results can be put to work in a variety of applications that include the design of profit-maximizing dynamic auctions with AR(k) values and the provision of experience goods.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 84.
Length: 84 pages
Date of creation: 2008
Date of revision:
dynamic mechanisms; asymmetric information; stochastic processes; incentives;
Other versions of this item:
- Alessandro Pavan & Ilya Segal & Juuso Toikka, 2009. "Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure," Discussion Papers 1501, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Said, Maher, 2008.
"Auctions with Dynamic Populations: Efficiency and Revenue Maximization,"
11456, University Library of Munich, Germany.
- Said, Maher, 2012. "Auctions with dynamic populations: Efficiency and revenue maximization," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2419-2438.
- Zhang, Jun, 2013. "Revenue maximizing with return policy when buyers have uncertain valuations," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 452-461.
- Auray, Stéphane & Mariotti, Thomas & Moizeau, Fabien, 2007.
"Dynamic Regulation of Quality,"
IDEI Working Papers
397, Institut d'Économie Industrielle (IDEI), Toulouse.
- StÃ©phane Auray & Thomas Mariotti & Fabien Moizeau, 2011. "Dynamic regulation of quality," Working Papers 245736, Institut National de la Recherche Agronomique, France.
- Stéphane Auray & Thomas Mariotti & Fabien Moizeau, 2008. "Dynamic Regulation of Quality," Cahiers de recherche 08-11, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
- Deb, Rahul, 2008. "Optimal Contracting Of New Experience Goods," MPRA Paper 9880, University Library of Munich, Germany.
- Daniel Garrett & Alessandro Pavan, 2009.
"Dynamic Managerial Compensation: a Mechanism Design Approach,"
Carlo Alberto Notebooks
127, Collegio Carlo Alberto.
- Daniel Garrett & Alessandro Pavan, 2009. "Dynamic Managerial Compensation: A Mechanism Design Approach," 2009 Meeting Papers 375, Society for Economic Dynamics.
- Daniel Garrett & Alessandro Pavan, 2009. "Dynamic Managerial Compensation: a Mechanism Design Approach," Discussion Papers 1491, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- George-Marios Angeletos & Alessandro Pavan, 2006.
"Socially Optimal Coordination: Characterization and Policy Implications,"
1496, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- George-Marios Angeletos & Alessandro Pavan, 2007. "Socially Optimal Coordination: Characterization and Policy Implications," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 585-593, 04-05.
- George-Marios Angeletos & Alessandro Pavan, 2006. "Socially Optimal Coordination: Characterization and Policy Implications," NBER Working Papers 12778, National Bureau of Economic Research, Inc.
- Daniel F. Garrett & Alessandro Pavan, 2012.
"Managerial Turnover in a Changing World,"
Journal of Political Economy,
University of Chicago Press, vol. 120(5), pages 879 - 925.
- Marco LiCalzi & Alessandro Pavan, 2003.
"Tilting the Supply Schedule to Enhance Competition in Uniform-Price Auctions,"
2003.22, Fondazione Eni Enrico Mattei.
- LiCalzi, Marco & Pavan, Alessandro, 2005. "Tilting the supply schedule to enhance competition in uniform-price auctions," European Economic Review, Elsevier, vol. 49(1), pages 227-250, January.
- Marco LiCalz & Alessandro Pavan, 2002. "Tilting the Supply Schedule to Enhance Competition on Uniform-Price Auctions," Discussion Papers 1495, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Marco LiCalzi & Alessandro Pavan, 2002. "Tilting the Supply Schedule to Enhance Competition in Uniform- Price Auctions," Game Theory and Information 0210003, EconWPA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giovanni Bert).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.