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Mechanisms with Referrals: VCG Mechanisms and Multilevel Mechanisms

Joosung Lee
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Joosung Lee: Business School, University of Edinburgh

No 2017.27, Working Papers from Fondazione Eni Enrico Mattei

Abstract: We study mechanisms for environments in which only some of the agents are directly connected to a mechanism designer and the other agents can participate in a mechanism only through the connected agents' referrals. In such environments, the mechanism designer and agents may have different interest in varying participants so that agents strategically manipulate their preference as well as their network connection to avoid competition or congestion; while the mechanism designer wants to elicit the agents' private information about both preferences and network connections. As a benchmark for an efficient mechanism, we re-define a VCG mechanism. It is incentive compatible and individually rational, but it generically runs a deficit as it requires too much compensation for referrals. Alternatively as a budget-surplus mechanism, we introduce a multilevel mechanism, in which each agent is compensated by the agents who would not be able to participate without her referrals. Under a multilevel mechanism, we show that fully referring one's acquaintances is a dominant strategy and agents have no incentive to under-report their preference if the social welfare is submodular.

Keywords: Mechanism Design; Referral Program; Reward Scheme; VCG Mechanism; Multilevel Mechanism; Incentive Compatibility; Budget Feasibility (search for similar items in EconPapers)
JEL-codes: D82 D71 C72 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cdm, nep-des and nep-mic
Date: 2017-06
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Persistent link: https://EconPapers.repec.org/RePEc:fem:femwpa:2017.27

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