Mechanism Design with Side Payments: Individual Rationality and Iterative Dominance ( Published in "Journal of Economic Theory" (as a regular article). )
AbstractIn 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.
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Bibliographic InfoPaper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-050.
Length: 35 pages
Date of creation: Sep 2005
Date of revision:
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