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Mechanism design by an informed principal: the quasi-linear private-values case

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  • Tröger, Thomas
  • Mylovanov, Timofiy

Abstract

We show that, in environments with independent private values and transferable utility, a privately informed principal can solve her mechanism selection problem by implementing an allocation that is ex-ante optimal for her. No type of the principal can gain from proposing an alternative mechanism that is incentivefeasible with any belief that puts probability 0 on types that would strictly lose from proposing the alternative. We show that the solution exists in essentially any environment with finite type spaces, and in any linear-utility environment with continuous type spaces, allowing for arbitrary disagreement outcomes. As an application, we consider a bilateral exchange environment (Myerson and Satterthwaite, 1983) in which the principal is one of the traders. If the property rights over the good are dispersed among the traders, then the principal will implement an allocation in which she is almost surely better off than if her type is commonly known. The optimal mechanism is a combination of a participation fee, a buyout option for the principal, and a resale stage with posted prices and, hence, is a generalization of the posted price that would optimal if the principal's valuation were commonly known.

Suggested Citation

  • Tröger, Thomas & Mylovanov, Timofiy, 2012. "Mechanism design by an informed principal: the quasi-linear private-values case," Working Papers 12-14, University of Mannheim, Department of Economics.
  • Handle: RePEc:mnh:wpaper:32385
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    References listed on IDEAS

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    1. Eric W. Bond & Thomas A. Gresik, 1997. "Competition between asymmetrically informed principals," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(2), pages 227-240.
    2. Cella, Michela, 2008. "Informed principal with correlation," Games and Economic Behavior, Elsevier, vol. 64(2), pages 433-456, November.
    3. Beaudry, Paul, 1994. "Why an Informed Principal May Leave Rents to an Agent," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(4), pages 821-832, November.
    4. Tilman Börgers & Peter Norman, 2009. "A note on budget balance under interim participation constraints: the case of independent types," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(3), pages 477-489, June.
    5. Chade, Hector & Silvers, Randy, 2002. "Informed principal, moral hazard, and the value of a more informative technology," Economics Letters, Elsevier, vol. 74(3), pages 291-300, February.
    6. Celik, Gorkem, 2009. "Mechanism design with collusive supervision," Journal of Economic Theory, Elsevier, vol. 144(1), pages 69-95, January.
    7. Kfir Eliaz & Ran Spiegler, 2007. "A Mechanism-Design Approach to Speculative Trade," Econometrica, Econometric Society, vol. 75(3), pages 875-884, May.
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    Cited by:

    1. Jakub Kastl & Marco Pagnozzi & Salvatore Piccolo, 2015. "Selling Information to Competitive Firms," CSEF Working Papers 420, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.

    More about this item

    Keywords

    mechanism design; informed principal; ex-ante optimality; buyout option;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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