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

Tymofiy Mylovanov () and Thomas Tröger ()

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. Any Myerson neutral optimum is a neo-optimum, implying that a neooptimum exists generally. Neo-optimum unifies the other known solution approaches in the informed-principal literature.

Keywords: informed principal; mechanism design; signaling; neologism (search for similar items in EconPapers)
JEL-codes: D47 D82 (search for similar items in EconPapers)
Pages: 46
Date: 2025-02, Revised 2026-01
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