Mechanism Design with General Ex-Ante Investments (Revised version of F415 )
Hitoshi Matsushima and
No CARF-F-464, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo
We investigate the general mechanism design problems in which agents take ex-ante hidden actions (or investments) that influence state distribution. We show that the variety of action choices drastically shrinks the set of mechanisms that induce targeted actions in the sense that there is a one-to-one tradeoff between the dimensionality of action space and that of payment rules with which the targeted action profile is taken in an equilibrium. This result comprehends the observations made by previous works. When agents can take unilateral deviations to change the state distribution in various directions, we have equivalence properties with respect to ex-post payoffs, payments, and revenues. In particular, the pure-VCG mechanism, the simplest form of the canonical VCG mechanism, becomes the only mechanism that induces an efficient action profile. Contrarily, the popular pivot mechanism generically fails to induce efficient actions, even when the action space is one-dimensional.
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