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Neo-Optimum: A Unifying Solution to the Informed-Principal Problem

Author

Listed:
  • Tymofiy Mylovanov

  • Thomas Tröger

Abstract

A mechanism proposal by a privately informed principal is a signal. The agents' belief updating endogenizes their incentives in the mechanism, implying that such design problems cannot be solved via optimizing subject to incentive constraints. We propose a solution, neo-optimum, that can be interpreted as principal-preferred perfect-Bayesian equilibrium. Its neologism-based definition allows an intuitive computation, as we demonstrate in several applications. Neo-optimum connects the two main established approaches to the problem, by Myerson and by Maskin-Tirole. Any Myerson neutral optimum is a neo-optimum, implying that a neo-optimum generally exists. In private-values environments, neo-optimum is equivalent to strong unconstrained Pareto optimum (Maskin-Tirole) and strong neologism-proofness (Mylovanov-Tröger). In information-design settings, any interim-optimum (Koessler-Skreta) is a neo-optimum. Our methods can be used to reconstruct the perfect-Bayesian equilibria in the informed-principal literature.

Suggested Citation

  • Tymofiy Mylovanov & Thomas Tröger, 2025. "Neo-Optimum: A Unifying Solution to the Informed-Principal Problem," CRC TR 224 Discussion Paper Series crctr224_2025_643, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2025_643
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    Keywords

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    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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