IDEAS home Printed from https://ideas.repec.org/p/bon/boncrc/crctr224_2025_643.html
   My bibliography  Save this paper

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
    as

    Download full text from publisher

    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp643
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Mailath, George J, 1987. "Incentive Compatibility in Signaling Games with a Continuum of Types," Econometrica, Econometric Society, vol. 55(6), pages 1349-1365, November.
    2. Yilankaya, Okan, 1999. "A Note on the Seller's Optimal Mechanism in Bilateral Trade with Two-Sided Incomplete Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 267-271, July.
    3. Xin Zhao, 2023. "Auction design by an informed seller: A foundation of reserve price signalling," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 1161-1190, August.
    4. Laffont, Jean-Jacques, 2001. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780199248681, Decembrie.
    5. Balkenborg, Dieter & Makris, Miltiadis, 2015. "An undominated mechanism for a class of informed principal problems with common values," Journal of Economic Theory, Elsevier, vol. 157(C), pages 918-958.
    6. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Georges Dionne, 2003. "The Foundationsof Banks' Risk Regulation: A Review of Literature," THEMA Working Papers 2003-46, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    2. Guerriero, Carmine, 2006. "Dependent Controllers and Regulation Policies: Theory and Evidence," Privatisation Regulation Corporate Governance Working Papers 12204, Fondazione Eni Enrico Mattei (FEEM).
    3. Boggio, Margherita, 2011. "Municipal capitalism, regulatory federalism and politics," MPRA Paper 46244, University Library of Munich, Germany.
    4. Takeshi Nishimura, 2019. "Informed Principal Problems in Bilateral Trading," Papers 1906.10311, arXiv.org, revised Feb 2022.
    5. Guerriero, Carmine, 2013. "The political economy of incentive regulation: Theory and evidence from US states," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 91-107.
    6. Dixit Avinash K, 2010. "Democracy, Autocracy and Bureaucracy," Journal of Globalization and Development, De Gruyter, vol. 1(1), pages 1-47, January.
    7. Giuseppe, DE FEO & Jean, HINDRIKS, 2005. "Efficiency of Competition in Insurance Markets with Adverse Selection," Discussion Papers (ECON - Département des Sciences Economiques) 2005042, Université catholique de Louvain, Département des Sciences Economiques.
    8. J. Guasch & Jean-Jacques Laffont & Stéphane Straub, 2006. "Renegotiation of Concession Contracts: A Theoretical Approach," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 29(1), pages 55-73, September.
    9. Koessler, Frédéric & Skreta, Vasiliki, 2016. "Informed seller with taste heterogeneity," Journal of Economic Theory, Elsevier, vol. 165(C), pages 456-471.
    10. Raffaele Fiocco & Mario Gilli, 2012. "Bargaining and Collusion in a Regulatory Model," Chapters, in: Joseph E. Harrington Jr & Yannis Katsoulacos (ed.), Recent Advances in the Analysis of Competition Policy and Regulation, chapter 12, Edward Elgar Publishing.
    11. Anastasios Dosis, 2022. "On the informed principal model with common values," RAND Journal of Economics, RAND Corporation, vol. 53(4), pages 792-825, December.
    12. Hiriart, Yolande & Martimort, David & Pouyet, Jerome, 2010. "The public management of risk: Separating ex ante and ex post monitors," Journal of Public Economics, Elsevier, vol. 94(11-12), pages 1008-1019, December.
    13. Mylovanov, Timofiy & Troger, Thomas E., 2012. "Informed principal problems in generalized private values environments," Theoretical Economics, Econometric Society, vol. 7(3), September.
    14. Margherita Boggio, 2016. "Regulatory biases under local partial privatization," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 43(2), pages 157-174, June.
    15. Chiappinelli, Olga, 2020. "Political corruption in the execution of public contracts," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 116-140.
    16. Ali Choudhary & Paul Levine, 2004. "Can Risk Aversion in Firms Reduce Unemployment Persistence?," School of Economics Discussion Papers 0704, School of Economics, University of Surrey.
    17. Francesco Giuli & Marco Manzo, 2005. "Protecting Savings: Do We Need a Supervision Authority?," Working Papers in Public Economics 84, Department of Economics and Law, Sapienza University of Roma.
    18. Martimort, David & Pouyet, Jérôme & Hiriart, Yolande, 2005. "The Public Management of Environmental Risk: Separating Ex Ante and Ex Post Monitors," CEPR Discussion Papers 4992, C.E.P.R. Discussion Papers.
    19. Mishra, Ajit & Anant, T.C.A., 2006. "Activism, separation of powers and development," Journal of Development Economics, Elsevier, vol. 81(2), pages 457-477, December.
    20. Koessler, Frederic & Skreta, Vasiliki, 2019. "Selling with evidence," Theoretical Economics, Econometric Society, vol. 14(2), May.

    More about this item

    Keywords

    mechanism-design; informed-principal; neologism;
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bon:boncrc:crctr224_2025_643. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CRC Office (email available below). General contact details of provider: https://www.crctr224.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.