Individually Rational, Balanced-Budget Bayesian Mechanisms and the Informed Principal Problem

Grigory Kosenok, Sergei Severinov
2004 Social Science Research Network  
We investigate the issue of implementation via individually rational ex-post budgetbalanced Bayesian mechanisms. We demonstrate that all social choice rules that generate a nonnegative ex-ante surplus, including ex-post efficient ones, can generically be implemented via such mechanisms for any profile of the utility functions. The aggregate expected surplus in these mechanisms can be distributed in an arbitrary way. Also generically, any ex-post efficient social choice rule can be implemented
more » ... an informed principal framework, i.e. when the mechanism is offered by one of the informed parties. Only ex-post efficient social choice rules that allocate all surplus to the party designing the mechanism are both sequential equilibrium outcomes and neutral optima, i.e. outcomes that can never be blocked. This result implies that even an informed principal can extract all surplus from players in a Bayesian mechanism. JEL Nos: C72, D82. and sseverin@duke.edu. We thank Mike Peters, Marco Ottaviani, Lars Stole, and seminar participants at Duke, UBC, Carlos Tercero, LBS, Wisconsin and University of Arizona for comments, and especially Ennio Stacchetti for very helpful suggestions at the initial stage of this project. All errors are our own.
doi:10.2139/ssrn.628621 fatcat:35ps5lahy5aolja2r2gthq5mzm