Neo-Optimum: A Unifying Solution to the Informed-Principal Problem

Tymofiy Mylovanov () and Thomas Tröger ()
Authors registered in the RePEc Author Service: Thomas Troeger

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: A mechanism proposal by a privately informed principal is a signal. The agents' belief updating endogenizes their incentives in the mechanism, implying that such design problems cannot be solved via optimizing subject to incentive constraints. We propose a solution, neo-optimum, that can be interpreted as principal-preferred perfect-Bayesian equilibrium. Its neologism-based definition allows an intuitive computation, as we demonstrate in several applications. Neo-optimum connects the two main established approaches to the problem, by Myerson and by Maskin-Tirole. Any Myerson neutral optimum is a neo-optimum, implying that a neo-optimum generally exists. In private-values environments, neo-optimum is equivalent to strong unconstrained Pareto optimum (Maskin-Tirole) and strong neologism-proofness (Mylovanov-Tröger). In information-design settings, any interim-optimum (Koessler-Skreta) is a neo-optimum. Our methods can be used to reconstruct the perfect-Bayesian equilibria in the informed-principal literature.

Keywords: mechanism-design; informed-principal; neologism (search for similar items in EconPapers)
JEL-codes: D47 D82 (search for similar items in EconPapers)
Pages: 62
Date: 2025-02
New Economics Papers: this item is included in nep-cta, nep-des, nep-gth and nep-mic
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