Bilateral Mechanism Design: Practical Contracting in Multi-Agency

Yu Chen ()
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Yu Chen: Nanjing University

No 2013-003, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: We modelize and investigate the analytical rationale of employing bilateral mechanism design, which simplifies collective mechanism design by ignoring relative information evaluation, in generalized multi-agency contracting games under Bayesian Nash equilibrium. We permit interdependent valuations, contract externalities, correlated types, and heterogeneous or different message sets of different agents. The delegation principle under Bayesian Nash equilibrium identifies that bilateral Bayesian mechanism design can be translated to delegated Bayesian menu design without loss of generality. We take advantage of interim-payoff-equivalence to provide economically interesting conditions on the primitives for the full equivalence in which bilateral mechanism design can be substituted for collective mechanism design. Our analysis can also incorporate individual rationality constraints. Moreover, we discuss the approximation of full equivalence and the case allowing primitive constraints across the contracts for different agents.

Keywords: Bayesian Nash equilibrium; mechanism design; menu design; delegation principle; interim-payoff-equivalence (search for similar items in EconPapers)
JEL-codes: C72 D82 D86 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2013-03
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