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Mechanism Design with Side Payments: Individual Rationality and Iterative Dominance ( Published in "Journal of Economic Theory" (as a regular article). )

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  • Hitoshi Matsushima

    (Faculty of Economics, University of Tokyo)

Abstract

In this paper, we investigate the collective decision problem with incomplete information and side payments. We show that a direct mechanism associated with the social choice function that satisfies budget balancing, incentive compatibility, and interim individual rationality exists for generic prior distributions. We consider the possibility that a risk-averse principal extracts full surplus in agency problems with adverse selection. Additionally, with regard to generic prior distributions, we show that there exists a modified direct mechanism associated with the virtual social choice function, which satisfies budget balancing and interim individual rationality, such that truth telling is the unique three times iteratively undominated message rule profile.

Suggested Citation

  • Hitoshi Matsushima, 2005. "Mechanism Design with Side Payments: Individual Rationality and Iterative Dominance ( Published in "Journal of Economic Theory" (as a regular article). )," CARF F-Series CARF-F-050, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf050
    as

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    References listed on IDEAS

    as
    1. Matsushima Hitoshi, 1993. "Bayesian Monotonicity with Side Payments," Journal of Economic Theory, Elsevier, vol. 59(1), pages 107-121, February.
    2. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    3. Matsushima, Hitoshi, 1991. "Incentive compatible mechanisms with full transferability," Journal of Economic Theory, Elsevier, vol. 54(1), pages 198-203, June.
    4. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, December.
    5. McAfee, R. Preston, 1991. "Efficient allocation with continuous quantities," Journal of Economic Theory, Elsevier, vol. 53(1), pages 51-74, February.
    6. Arya Anil & Glover Jonathan & Young Richard, 1995. "Virtual Implementation in Separable Bayesian Environments Using Simple Mechanisms," Games and Economic Behavior, Elsevier, vol. 9(2), pages 127-138, May.
    7. Costa-Gomes, Miguel & Crawford, Vincent P & Broseta, Bruno, 2001. "Cognition and Behavior in Normal-Form Games: An Experimental Study," Econometrica, Econometric Society, vol. 69(5), pages 1193-1235, September.
    8. Cremer, Jacques, & Riordan, Michael H, 1985. "A Sequential Solution to the Public Goods Problem," Econometrica, Econometric Society, vol. 53(1), pages 77-84, January.
    9. Hitoshi Matsushima, 2004. "Non-Consequential Moral Preferences, Detail-Free Implementation, and Representative Systems," CIRJE F-Series CIRJE-F-304, CIRJE, Faculty of Economics, University of Tokyo.
    10. Johnson, Scott & Pratt, John W & Zeckhauser, Richard J, 1990. "Efficiency Despite Mutually Payoff-Relevant Private Information: The Finite Case," Econometrica, Econometric Society, vol. 58(4), pages 873-900, July.
    11. Matsushima, Hitoshi, 1990. "Dominant strategy mechanisms with mutually payoff-relevant private information and with public information," Economics Letters, Elsevier, vol. 34(2), pages 109-112, October.
    12. Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-361, March.
    13. Hitoshi Matsushima, 2004. "Non-Consequential Moral Preferences, Detail-Free Implementation, and Representative Systems ( Revised as CARF-F-062(2006) )," CARF F-Series CARF-F-015, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    14. Aoyagi, Masaki, 1998. "Correlated Types and Bayesian Incentive Compatible Mechanisms with Budget Balance," Journal of Economic Theory, Elsevier, vol. 79(1), pages 142-151, March.
    15. Abreu, Dilip & Matsushima, Hitoshi, 1992. "Virtual Implementation in Iteratively Undominated Strategies: Complete Information," Econometrica, Econometric Society, vol. 60(5), pages 993-1008, September.
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