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Mechanism Design with Collusion and Correlation

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  • Laffont, Jean-Jacques
  • Martimort, David

Abstract

In a public good environment with positively correlated types, we characterize optimal mechanisms when agents have private information and can enter collusive agreements. First, we prove a weak-collusion-proof principle according to which there is no restriction for the principal in offering weak-collusion-proof mechanisms. Second, with this principle, we characterize the set of allocations that satisfy individual and coalitional incentive constraints. The optimal weakly collusion-proof mechanism calls for distortions away from first-best efficiency obtained without collusion. Allowing collusion restores continuity between the correlated and the uncorrelated environments. When the correlation becomes almost perfect, first-best efficiency is approached. Finally, the optimal collusion-proof mechanism is strongly ratifiable.
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Suggested Citation

  • Laffont, Jean-Jacques & Martimort, David, 1998. "Mechanism Design with Collusion and Correlation," IDEI Working Papers 81, Institut d'Économie Industrielle (IDEI), Toulouse.
  • Handle: RePEc:ide:wpaper:1283
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    References listed on IDEAS

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    1. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
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    3. Robert, Jacques, 1991. "Continuity in auction design," Journal of Economic Theory, Elsevier, vol. 55(1), pages 169-179, October.
    4. Laffont, Jean-Jacques & Tirole, Jean, 1986. "Using Cost Observation to Regulate Firms," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 614-641, June.
    5. Green, Jerry & Laffont, Jean-Jacques, 1977. "Characterization of Satisfactory Mechanisms for the Revelation of Preferences for Public Goods," Econometrica, Econometric Society, vol. 45(2), pages 427-438, March.
    6. Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-1257, November.
    7. Riordan, Michael H. & Sappington, David E. M., 1988. "Optimal contracts with public ex post information," Journal of Economic Theory, Elsevier, vol. 45(1), pages 189-199, June.
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