IDEAS home Printed from https://ideas.repec.org/p/nwu/cmsems/1501.html
   My bibliography  Save this paper

Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure

Author

Listed:
  • Alessandro Pavan
  • Ilya Segal
  • Juuso Toikka

Abstract

We examine the design of incentive-compatible screening mechanisms for dynamic environments in which the agents types follow a (possibly non-Markov) stochastic process, decisions may be made over time and may affect the type process, and payoffs need not be time-separable. We derive a formula for the derivative of an agent’s equilibrium payoff with respect to his current type in an incentive-compatible mechanism, which summarizes all first-order conditions for incentive compatibility and generalizes Mirrlees’s envelope formula of static mechanism design. We provide conditions on the environment under which this formula must hold in any incentive-compatible mechanism. When specialized to quasi-linear environments, this formula yields a dynamic revenue-equivalence result and an expression for dynamic virtual surplus, which is instrumental for the design of optimal mechanisms. We also provide some sufficient conditions for incentive compatibility, and for its robustness to an agent’s observation of the other agents’ past and future types. We apply these results to a number of novel settings, including the design of profit-maximizing auctions and durable-good selling mechanisms for buyers whose values follow an AR(k) process.

Suggested Citation

  • Alessandro Pavan & Ilya Segal & Juuso Toikka, 2009. "Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization and Information Disclosure," Discussion Papers 1501, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    • Handle: RePEc:nwu:cmsems:1501
    as

    Download full text from publisher

    File URL: http://faculty.wcas.northwestern.edu/~apa522/DMD-revised-final.pdf
    File Function: main text
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Drexl, Moritz & Kleiner, Andreas, 2013. "Preference Intensities in Repeated Collective Decision-Making," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79832, Verein für Socialpolitik / German Economic Association.
    2. Eduardo Dávila & Benjamin Hébert, 2023. "Optimal Corporate Taxation Under Financial Frictions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(4), pages 1893-1933.
    3. Tao Zhang & Quanyan Zhu, 2020. "Implementability of Honest Multi-Agent Sequential Decision-Making with Dynamic Population," Papers 2003.03173, arXiv.org, revised May 2020.
    4. LiCalzi, Marco & Pavan, Alessandro, 2005. "Tilting the supply schedule to enhance competition in uniform-price auctions," European Economic Review, Elsevier, vol. 49(1), pages 227-250, January.
    5. Hamid Nazerzadeh & Amin Saberi & Rakesh Vohra, 2013. "Dynamic Pay-Per-Action Mechanisms and Applications to Online Advertising," Operations Research, INFORMS, vol. 61(1), pages 98-111, February.
    6. Thibaut Mastrolia & Dylan Possamaï, 2018. "Moral Hazard Under Ambiguity," Journal of Optimization Theory and Applications, Springer, vol. 179(2), pages 452-500, November.
    7. Said, Maher, 2012. "Auctions with dynamic populations: Efficiency and revenue maximization," Journal of Economic Theory, Elsevier, vol. 147(6), pages 2419-2438.
    8. Tao Zhang & Quanyan Zhu, 2019. "On Incentive Compatibility in Dynamic Mechanism Design With Exit Option in a Markovian Environment," Papers 1909.13720, arXiv.org, revised May 2021.
    9. Stéphane Auray & Thomas Mariotti & Fabien Moizeau, 2011. "Dynamic regulation of quality," RAND Journal of Economics, RAND Corporation, vol. 42(2), pages 246-265, June.
    10. Ying-Ju Chen, 2011. "Optimal Selling Scheme for Heterogeneous Consumers with Uncertain Valuations," Mathematics of Operations Research, INFORMS, vol. 36(4), pages 695-720, November.
    11. Mettral, Thomas, 2018. "Deterministic versus Stochastic Contracts in a Dynamic Principal-Agent Model," Rationality and Competition Discussion Paper Series 93, CRC TRR 190 Rationality and Competition.
    12. Daniel F. Garrett & Alessandro Pavan, 2012. "Managerial Turnover in a Changing World," Journal of Political Economy, University of Chicago Press, vol. 120(5), pages 879-925.
    13. Xiaojun Zhao, 2015. "Optimal Income Taxations with Information Asymmetry: The Lagrange Multiplier Approach," Annals of Economics and Finance, Society for AEF, vol. 16(1), pages 199-229, May.
    14. Vahab Mirrokni & Renato Paes Leme & Pingzhong Tang & Song Zuo, 2020. "Non‐Clairvoyant Dynamic Mechanism Design," Econometrica, Econometric Society, vol. 88(5), pages 1939-1963, September.
    15. Daniel Garrett & Alessandro Pavan, 2009. "Dynamic Managerial Compensation: A Mechanism Design Approach," 2009 Meeting Papers 375, Society for Economic Dynamics.
    16. Tao Zhang & Quanyan Zhu, 2022. "On Incentive Compatibility in Dynamic Mechanism Design With Exit Option in a Markovian Environment," Dynamic Games and Applications, Springer, vol. 12(2), pages 701-745, June.
    17. Papadimitriou, Christos & Pierrakos, George & Psomas, Alexandros & Rubinstein, Aviad, 2022. "On the complexity of dynamic mechanism design," Games and Economic Behavior, Elsevier, vol. 134(C), pages 399-427.
    18. Mallesh M. Pai & Rakesh Vohra, 2013. "Optimal Dynamic Auctions and Simple Index Rules," Mathematics of Operations Research, INFORMS, vol. 38(4), pages 682-697, November.
    19. Zhang, Jun, 2013. "Revenue maximizing with return policy when buyers have uncertain valuations," International Journal of Industrial Organization, Elsevier, vol. 31(5), pages 452-461.
    20. George-Marios Angeletos & Alessandro Pavan, 2007. "Socially Optimal Coordination: Characterization and Policy Implications," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 585-593, 04-05.
    21. Deb, Rahul, 2008. "Optimal Contracting Of New Experience Goods," MPRA Paper 9880, University Library of Munich, Germany.
    22. Thomas Mettral, 2018. "Deterministic versus stochastic contracts in a dynamic principal-agent model," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 209-218, October.

    More about this item

    Keywords

    asymmetric information; stochastic processes; incentives JEL Classification Numbers: D82; C73; L1;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1501. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Fran Walker (email available below). General contact details of provider: https://edirc.repec.org/data/cmnwuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.