A General Theory of Dynamic Mechanism Design with Endogenous Information and Hidden Actions

Guoqiang Tian

Papers from arXiv.org

Abstract: We develop a general theory of dynamic mechanism design along two dimensions: joint endogeneity and interaction of hidden actions, information production, and disclosure; and generality across economic environments and feasibility structures. We accommodate correlated private information, interdependent preferences, and potentially infinite-dimensional allocations. We introduce joint perfect correlated Bayesian equilibrium, establish a dynamic revelation principle under this concept, and recursively characterize incentive compatibility. Focusing on a private-values environment allows us to characterize joint incentives through choice optimality, reporting-envelope first-order conditions, global integral monotonicity, and history-report incentives. We derive an exact dynamic information-rent identity, conditional revenue equivalence, and dynamic virtual surplus. Comparing first-best, two second-best, and third-best contracts distinguishes information rents, hidden-action implementation costs, and direct information-production expenditures, revealing nonadditive interactions and branched outcomes. We characterize feasible and optimal disclosure. Applications show the Milgrom-Weber revenue ranking can reverse with endogenous information acquisition, while optimal financial-contract disclosure may be absent, interior, or complete.

Date: 2026-11
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