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Mechanism Design Without Revenue Equivalence

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Abstract

We study mechanism design problems in quasi-linear environments where the en- velope theorem and revenue equivalence principle fail due to non-convex and non- differentiable valuations. Despite these obstacles, we obtain a characterization of in- centive compatibility based on the familiar Mirrlees representation of the indirect util- ity and a monotonicity condition on the allocation rule. These conditions pin down the range of possible payoffs as a function solely of the allocation rule, thus providing a revenue inequality. We illustrate the usefulness of our approach in three economic applications where standard techniques do not apply: we derive the optimal selling mechanism in a buyer-seller situation where the buyer has loss-averse preferences; we find a zero payment (hence budget-balanced) efficient mechanism in a public goods lo- cation model; and we consider a principal–agent model with ex post non-contractible actions available to the agent.

Suggested Citation

  • Juan Carlos Carbajal & Jeffrey C. Ely, 2012. "Mechanism Design Without Revenue Equivalence," Discussion Papers Series 458, School of Economics, University of Queensland, Australia.
  • Handle: RePEc:qld:uq2004:458
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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