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|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
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Web page: http://www.econ.iastate.edu
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- Cremer, Jacques & McLean, Richard P, 1985. "Optimal Selling Strategies under Uncertainty for a Discriminating Monopolist When Demands Are Interdependent," Econometrica, Econometric Society, vol. 53(2), pages 345-61, March.
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- Cremer, Jacques & McLean, Richard P, 1988. "Full Extraction of the Surplus in Bayesian and Dominant Strategy Auctions," Econometrica, Econometric Society, vol. 56(6), pages 1247-57, November.
- Steven R. Williams & Georgia Kosmopoulou, 1998. "The robustness of the independent private value model in Bayesian mechanism design," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 393-421.
- McAfee, R Preston & Reny, Philip J, 1992. "Correlated Information and Mechanism Design," Econometrica, Econometric Society, vol. 60(2), pages 395-421, March.
- Robert, Jacques, 1991. "Continuity in auction design," Journal of Economic Theory, Elsevier, vol. 55(1), pages 169-179, October.
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