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Mechanism design by an informed principal: the quasi-linear private-values case

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  • Tröger, Thomas
  • Mylovanov, Timofiy

Abstract

We show that, in environments with independent private values and transferable utility, a privately informed principal can solve her mechanism selection problem by implementing an allocation that is ex-ante optimal for her. No type of the principal can gain from proposing an alternative mechanism that is incentivefeasible with any belief that puts probability 0 on types that would strictly lose from proposing the alternative. We show that the solution exists in essentially any environment with finite type spaces, and in any linear-utility environment with continuous type spaces, allowing for arbitrary disagreement outcomes. As an application, we consider a bilateral exchange environment (Myerson and Satterthwaite, 1983) in which the principal is one of the traders. If the property rights over the good are dispersed among the traders, then the principal will implement an allocation in which she is almost surely better off than if her type is commonly known. The optimal mechanism is a combination of a participation fee, a buyout option for the principal, and a resale stage with posted prices and, hence, is a generalization of the posted price that would optimal if the principal's valuation were commonly known.

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Paper provided by University of Mannheim, Department of Economics in its series Working Papers with number 12-14.

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Date of creation: 2012
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Handle: RePEc:mnh:wpaper:32385

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Keywords: mechanism design; informed principal; ex-ante optimality; buyout option;

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  1. Bond, E.W. & Gresik & T.A., 1995. "Competition Between Asymmetrically Informed Principals," Papers 11-95-13, Pennsylvania State - Department of Economics.
  2. Michela Cella, 2006. "Informed Principal with Correlation," Economics Series Working Papers 261, University of Oxford, Department of Economics.
  3. Tilman Borgers & Peter Norman, 2005. "A Note on Budget Balance under Interim Participation Constraints: The Case of Independent Types," Levine's Bibliography 784828000000000147, UCLA Department of Economics.
  4. Celik, Gorkem, 2004. "Mechanism Design with Collusive Supervision," Microeconomics.ca working papers celik-04-09-13-05-42-19, Vancouver School of Economics, revised 06 Aug 2008.
  5. Eliaz, Kfir & Spiegler, Ran, 2005. "A Mechanism-Design Approach to Speculative Trade," CEPR Discussion Papers 5434, C.E.P.R. Discussion Papers.
  6. Beaudry, Paul, 1994. "Why an Informed Principal May Leave Rents to an Agent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 821-32, November.
  7. Chade, Hector & Silvers, Randy, 2002. "Informed principal, moral hazard, and the value of a more informative technology," Economics Letters, Elsevier, vol. 74(3), pages 291-300, February.
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