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Bilateral Mechanism Design: Practical Contracting in Multi-Agency


  • Yu Chen

    () (Nanjing University)


We modelize and investigate the analytical rationale of employing bilateral mechanism design, which simplifies collective mechanism design by ignoring relative information evaluation, in generalized multi-agency contracting games under Bayesian Nash equilibrium. We permit interdependent valuations, contract externalities, correlated types, and heterogeneous or different message sets of different agents. The delegation principle under Bayesian Nash equilibrium identifies that bilateral Bayesian mechanism design can be translated to delegated Bayesian menu design without loss of generality. We take advantage of interim-payoff-equivalence to provide economically interesting conditions on the primitives for the full equivalence in which bilateral mechanism design can be substituted for collective mechanism design. Our analysis can also incorporate individual rationality constraints. Moreover, we discuss the approximation of full equivalence and the case allowing primitive constraints across the contracts for different agents.

Suggested Citation

  • Yu Chen, 2013. "Bilateral Mechanism Design: Practical Contracting in Multi-Agency," Caepr Working Papers 2013-003, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  • Handle: RePEc:inu:caeprp:2013003

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    References listed on IDEAS

    1. Page, Frank Jr., 1987. "The existence of optimal contracts in the principal-agent model," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 157-167, April.
    2. Vianney Dequiedt & David Martimort, 2007. "Mechanism Design with Private Communication," NajEcon Working Paper Reviews 843644000000000074,
    3. Page, Frank Jr. & Monteiro, Paulo K., 2003. "Three principles of competitive nonlinear pricing," Journal of Mathematical Economics, Elsevier, vol. 39(1-2), pages 63-109, February.
    4. Peters, Michael, 2001. "Common Agency and the Revelation Principle," Econometrica, Econometric Society, vol. 69(5), pages 1349-1372, September.
    5. David Martimort & Lars Stole, 2002. "The Revelation and Delegation Principles in Common Agency Games," Econometrica, Econometric Society, vol. 70(4), pages 1659-1673, July.
    6. Han, Seungjin, 2006. "Menu theorems for bilateral contracting," Journal of Economic Theory, Elsevier, vol. 131(1), pages 157-178, November.
    7. Page, Frank H, Jr, 1992. "Mechanism Design for General Screening Problems with Moral Hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 2(2), pages 265-281, April.
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    More about this item


    Bayesian Nash equilibrium; mechanism design; menu design; delegation principle; interim-payo¤-equivalence;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law


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