Implementation with Securities

Rahul Deb and Debasis Mishra

Working Papers from University of Toronto, Department of Economics

Abstract: We study mechanism design in a setting where agents know their types but are uncertain about the utility from any alternative. The final realized utility of each agent is observed by the principal and can be contracted upon. In such environments, the principal is not restricted to using only transfers but can employ security contracts which determine each agent's payoff as a function of their realized utility and the profile of announced types. We show that using security contracts instead of transfers expands the set of (dominant strategy) implementable social choice functions. Our main result is that in a finite type space, every social choice function that can be implemented using a security contract can also be implemented using a royalty contract. Royalty contracts are simpler and commonly used security contracts, in which agents initially pay a transfer and keep a fraction of their realized utility. We also identify a condition called acyclicity that is necessary and sufficient for implementation in these environments.

Keywords: dominant strategy implementation; acyclicity; security contracts; royalty contracts; cycle monotonicity (search for similar items in EconPapers)
JEL-codes: D44 D47 D71 D82 D86 (search for similar items in EconPapers)
Pages: Unknown pages
Date: 2013-04-22
New Economics Papers: this item is included in nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Implementation with securities (2013)
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