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Veto Constraint in Mechanism Design: Inefficiency with Correlated Types

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  • Olivier Compte
  • Philippe Jehiel

Abstract

We consider bargaining problems in which parties have access to outside options, the size of the pie is commonly known and each party privately knows the realization of her outside option. We allow for correlations in the distributions of outside options. Parties have a veto right, which allows them to obtain at least their outside option payoff in any event. Besides, agents can receive no subsidy ex post. We show that inefficiencies are inevitable whatever the exact form of correlation, as long as private information is dispersed. We also illustrate how veto constraints differ from ex post participation constraints. (JEL C78, D82)

Suggested Citation

  • Olivier Compte & Philippe Jehiel, 2009. "Veto Constraint in Mechanism Design: Inefficiency with Correlated Types," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 182-206, February.
  • Handle: RePEc:aea:aejmic:v:1:y:2009:i:1:p:182-206 Note: DOI: 10.1257/mic.1.1.182
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. David Martimort & Aggey Semenov & Lars Stole, 2017. "A Theory of Contracts with Limited Enforcement," Review of Economic Studies, Oxford University Press, pages 816-852.
    2. Stefano Galavotti & Nozomu Muto & Daisuke Oyama, 2011. "On efficient partnership dissolution under ex post individual rationality," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 87-123.
    3. Mark Fey & Kristopher Ramsay, 2009. "Mechanism design goes to war: peaceful outcomes with interdependent and correlated types," Review of Economic Design, Springer;Society for Economic Design, vol. 13(3), pages 233-250, September.
    4. Vianney Dequiedt & David Martimort, 2015. "Vertical Contracting with Informational Opportunism," American Economic Review, American Economic Association, pages 2141-2182.
    5. repec:eee:indorg:v:52:y:2017:i:c:p:133-164 is not listed on IDEAS
    6. Flesch, János & Schröder, Marc & Vermeulen, Dries, 2016. "Implementable and ex-post IR rules in bilateral trading with discrete values," Mathematical Social Sciences, Elsevier, vol. 84(C), pages 68-75.
    7. Saran, Rene, 2011. "Bilateral trading with naive traders," Games and Economic Behavior, Elsevier, vol. 72(2), pages 544-557, June.
    8. Jehiel, Philippe & Lamy, Laurent, 2015. "A mechanism design approach to the Tiebout hypothesis," CEPR Discussion Papers 10758, C.E.P.R. Discussion Papers.
    9. Gizatulina, Alia & Hellwig, Martin, 2014. "Beliefs, payoffs, information: On the robustness of the BDP property in models with endogenous beliefs," Journal of Mathematical Economics, Elsevier, vol. 51(C), pages 136-153.

    More about this item

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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