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Implementation with Securities

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  • Rahul Deb
  • Debasis Mishra

Abstract

We study mechanism design in a setting where agents know their types but are uncertain about the utility from any alternative. The final realized utility of each agent is observed by the principal and can be contracted upon. In such environments, the principal is not restricted to using only transfers but can employ security contracts which determine each agent's payoff as a function of their realized utility and the profile of announced types. We show that using security contracts instead of transfers expands the set of (dominant strategy) implementable social choice functions. Our main result is that in a finite type space, every social choice function that can be implemented using a security contract can also be implemented using a royalty contract. Royalty contracts are simpler and commonly used security contracts, in which agents initially pay a transfer and keep a fraction of their realized utility. We also identify a condition called acyclicity that is necessary and sufficient for implementation in these environments.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-484.

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Length: Unknown pages
Date of creation: 22 Apr 2013
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Handle: RePEc:tor:tecipa:tecipa-484

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Related research

Keywords: dominant strategy implementation; acyclicity; security contracts; royalty contracts; cycle monotonicity;

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References

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  1. Riley, John G, 1988. "Ex Post Information in Auctions," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 409-29, July.
  2. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-41, June.
  3. Claudio Mezzetti, 2004. "Mechanism Design with Interdependent Valuations: Efficiency," Econometrica, Econometric Society, vol. 72(5), pages 1617-1626, 09.
  4. Yeon-Koo Che & Jinwoo Kim, 2009. "Bidding With Securities: Comment," Discussion Papers 0809-10, Columbia University, Department of Economics.
  5. Sushil Bikhchandani & Shurojit Chatterji & Ron Lavi & Ahuva Mu'alem & Noam Nisan & Arunava Sen, 2006. "Weak Monotonicity Characterizes Deterministic Dominant-Strategy Implementation," Econometrica, Econometric Society, vol. 74(4), pages 1109-1132, 07.
  6. Donald Brown & Caterina Calsamiglia, 2007. "The Nonparametric Approach to Applied Welfare Analysis," Economic Theory, Springer, vol. 31(1), pages 183-188, April.
  7. Debasis Mishra & Souvik Roy, 2011. "Implementation in multidimensional dichotomous domains," Indian Statistical Institute, Planning Unit, New Delhi Discussion Papers 11-15, Indian Statistical Institute, New Delhi, India.
  8. Juan Carlos Carbajal & Andrew McLennan & Rabee Tourky, 2012. "Truthful Implementation and Preference Aggregation in Restricted Domains," Discussion Papers Series 459, School of Economics, University of Queensland, Australia.
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