The Full Surplus Extraction Theorem with Hidden Actions

Ichiro Obara
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Ichiro Obara: UCLA

The B.E. Journal of Theoretical Economics, 2008, vol. 8, issue 1

Abstract:

Consider a situation in which a principal commits to a mechanism first and then agents choose unobservable actions before their payoff-relevant types are realized. The agents' actions may affect not only their payoffs directly but also the distribution of their types as well. This paper extends Crémer and McLean's full surplus extraction theorem to such a setting. In this environment, it is shown that a principal may not succeed in extracting full surplus from agents when there are many actions to which the agents can deviate.

However, it is also shown that a principal can extract full surplus generically given any approximately efficient (completely) mixed action profile. This is achieved by using a general mechanism where agents announce both their types and their realized actions. Therefore, with hidden actions, there is a big gap between exact full surplus extraction and approximate full surplus extraction.

Keywords: auction; information acquisition; full surplus extraction; hidden action; mechanism design; mixed strategy; moral hazard; private strategy; virtual implementation (search for similar items in EconPapers)
JEL-codes: C72 D44 D82 (search for similar items in EconPapers)
Date: 2008
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Persistent link: http://EconPapers.repec.org/RePEc:bpj:bejtec:v:8:y:2008:i:1:n:8

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