Participation Rights and Mechanism Design

Peter S. Faynzilberg

No 1279, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

Abstract: This paper is concerned with the procedural aspects of collective choice and the impact of the parties' participation rights on the optimal mechanism. We find that the mechanism designer generally benefits from the selective engagement of the agents-the exclusion of some agent-types from the choice process. We show that optimization of mechanisms with voluntary participation involves two mutually dependent instruments: the scope of the agents' engagement, and the functional form of the social choice function. The benefits of selective engagement, as well as two optimization methodologies, are illustrated on principal-agent models. We find that the participation constraint is redundant and generally leads tot suboptimal mechanisms. Contrary to its general interpretation, this restriction does not reflect the voluntary aspect of the agents' participation. Rather, it gives them an additional entitlement: to force their involvement in the collective choice. We formulate a free-exit constraint that is devoid of incentives and fully accounts for the voluntary aspect of participation. It also leads to an equivalent representation of incentive-compatibility that explicates incentives and specifies the feasibility of a mechanism. Key words: Participation rights, voluntary participation, economics of information, incentives, incentive compatibility, principal-agent model.

Date: 1997-09
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