Optimal Use of Correlated Information in Mechanism Design When Full Surplus Extraction May Be Impossible
We study the mechanism design problem when the principal can condition the agent's transfers on the realization of ex post signals that are correlated with the agents' types. Cremer and McLean (Econometrica, 53(1985) 345-361; 56(1988) 1247-1258), McAfee and Reny (Econometrica, 6(1992) 395-421), Riordan and Sappington (JET, 45(1988) 189-199) studied situations where either the signals are rich enough, or the conditional signal distributions and agents' payoffs are such that a mechanism can be designed to fully extract the surplus from every agent. In this paper, we study the optimal utilization of the signals when full surplus extraction may not be possible. We assume that the cardinality of the signal space is smaller than that of the type space and the Riordan and Sappington conditions do not always hold. We study the optimal ways to utilize the signals. For some tractable special cases, we investigate the optimal mechanism and the level of surplus that can be extracted, and identify the agent types who obtain rent.
|Date of creation:||17 Jun 2003|
|Date of revision:|
|Publication status:||Published in Journal of Economic Theory 2007, vol. 135, pp. 357-381|
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"Contractual Design with Correlated Information Under Limited Liability,"
815, Queen's University, Department of Economics.
- Dominique M. Demougin & Devon A. Garvie, 1991. "Contractual Design with Correlated Information under Limited Liability," RAND Journal of Economics, The RAND Corporation, vol. 22(4), pages 477-489, Winter.
- 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.
- McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
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