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Renegotiation-proof Mechanism Design

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Abstract

We study a mechanism design problem under the assumption that renegotiation cannot be prevented. We investigate what kind of equilibria of which mechanisms are renegotiation-proof under a variety of renegotiation procedures, and which social choice functions can be implemented in a way that is renegotiation-proof. In complete information environments, we show that the set of ex post renegotiation-proof implementable social choice functions contains all ex post efficient allocations when there at least three agents, but only budget balanced Groves allocations when there are two agents. In incomplete information environments with correlated beliefs and at least three agents, every ex post efficient social choice function can be implemented in the presence of ex post renegotiation, but with independent private values only social choice functions that are given by budget balanced “Groves in expectations” mechanisms are implementable in such a way. We further show that the requirement of interim renegotiation-proofness does not impose additional restrictions on implementable social choice functions under complete information, but is likely to impose additional restrictions under incomplete information.

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Bibliographic Info

Paper provided by University of Western Ontario, Department of Economics in its series UWO Department of Economics Working Papers with number 20101.

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Date of creation: 2010
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Handle: RePEc:uwo:uwowop:20101

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Postal: Department of Economics, Reference Centre, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2
Phone: 519-661-2111 Ext.85244
Web page: http://economics.uwo.ca/research/research_papers/department_working_papers.html

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Keywords: Mechanism design; Implementation; Ex post renegotiation; Interim renegotiation;

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References

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  1. Evans, R., 2006. "Mechanism Design with Renegotiation and Costly Messages," Cambridge Working Papers in Economics 0626, Faculty of Economics, University of Cambridge.
  2. Dirk Bergemann & Stephen Morris, 2003. "Robust Mechanism Design," Cowles Foundation Discussion Papers 1421, Cowles Foundation for Research in Economics, Yale University.
  3. Chung, Tai-Yeong, 1991. "Incomplete Contracts, Specific Investments, and Risk Sharing," Review of Economic Studies, Wiley Blackwell, vol. 58(5), pages 1031-42, October.
  4. Forges, Francoise & Minelli, Enrico & Vohra, Rajiv, 2002. "Incentives and the core of an exchange economy: a survey," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 1-41, September.
  5. Pablo Amorós, 2003. "Nash Implementation and Uncertain Renegotiation," Economic Working Papers at Centro de Estudios Andaluces E2003/27, Centro de Estudios Andaluces.
  6. Aaron S. Edlin & Stefan Reichelstein, 1995. "Holdups, Standard Breach Remedies, and Optimal Investment," NBER Working Papers 5007, National Bureau of Economic Research, Inc.
  7. Nöldeke, Georg & Schmidt, Klaus M., 1997. "Sequential Investments and Options to Own," CEPR Discussion Papers 1645, C.E.P.R. Discussion Papers.
  8. Alon Klement & Zvika Neeman, 2003. "Against Compromise: A Mechanism Design Approach," Discussion Paper Series dp290, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  9. Jeff Ely, 2003. "Foundations of Dominant Strategy Mechanisms," Theory workshop papers 658612000000000064, UCLA Department of Economics.
  10. Dirk Bergemann & Juuso Valimaki, 2002. "Information Acquisition and Efficient Mechanism Design," Econometrica, Econometric Society, vol. 70(3), pages 1007-1033, May.
  11. Kosenok, Grigory & Severinov, Sergei, 2008. "Individually rational, budget-balanced mechanisms and allocation of surplus," Journal of Economic Theory, Elsevier, vol. 140(1), pages 126-161, May.
  12. Thomas P. Lyon & Eric Rasmusen, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Working Papers 2004-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  13. Beaudry, P. & Poitevin, M., 1993. "Contract Renegotiation: A Simple Framework and Implications for Organization Theory," Cahiers de recherche 9332, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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Cited by:
  1. David Rahman, 2012. "But Who Will Monitor the Monitor?," American Economic Review, American Economic Association, vol. 102(6), pages 2767-97, October.

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