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This paper generalizes the concept of Bayes' correlated equilibrium Bergemann and Morris (2016) to multistage games. We apply our characterization results to a number of illustrative examples and applications. [ABSTRACT FROM AUTHOR]

This paper studies the issue of advertising outsourcing and production planning for a manufacturer facing asymmetric advertising cost and uncertain market demand. To improve product sales, a manufacturer would hire an advertising agency to provide professional service on product advertising before the production takes place. A contract taking into account both advertising effort level and payment is introduced to incentivize the advertising agency to report the exact cost to the manufacturer. Furthermore, a model with the goal of maximising the manufacturer's net profit is proposed, in which both product demand and payment to the advertising agency are affected by the advertising effort level. Analytical solutions of the optimal strategies including the optimal advertising effort level and the optimal payment to the advertising agency are derived. Optimal retail price and the optimal production quantity are also obtained for the manufacturer in making managerial decisions. [ABSTRACT FROM AUTHOR]

We develop a tool akin to the revelation principle for dynamic mechanism‐selection games in which the designer can only commit to short‐term mechanisms. We identify a canonical class of mechanisms rich enough to replicate the outcomes of any equilibrium in a mechanism‐selection game between an uninformed designer and a privately informed agent. A cornerstone of our methodology is the idea that a mechanism should encode not only the rules that determine the allocation, but also the information the designer obtains from the interaction with the agent. Therefore, how much the designer learns, which is the key tension in design with limited commitment, becomes an explicit part of the design. Our result simplifies the search for the designer‐optimal outcome by reducing the agent's behavior to a series of participation, truth telling, and Bayes' plausibility constraints the mechanisms must satisfy. [ABSTRACT FROM AUTHOR]

We describe prerequisites for the emergence of the key concept of incentive compatibility in the theory of active systems and mechanism design and give a survey of approaches to this problem, which have led to stating the fair play and revelation principles, and of current trends in this branch of scientific knowledge. Potential difficulties and development prospects are discussed. [ABSTRACT FROM AUTHOR]

We introduce two novel matching mechanisms, Reverse Top Trading Cycles (RTTC) and Reverse Deferred Acceptance (RDA), with the purpose of challenging the idea that the theoretical property of strategy-proofness induces high rates of truth-telling in economic experiments. RTTC and RDA are identical to the celebrated Top Trading Cycles (TTC) and Deferred Acceptance (DA) mechanisms, respectively, in all their theoretical properties except that their dominant-strategy equilibrium is to report one's preferences in the order opposite to the way they were induced. With the focal truth-telling strategy being out of equilibrium, we are able to perform a clear measurement of how much of the truth-telling reported for strategy-proof mechanisms is compatible with rational behaviour and how much of it is caused by confused decision-makers following a default, focal strategy without understanding the structure of the game. In a school-allocation setting, we find that roughly half of the observed truth-telling under TTC and DA is the result of naïve (non-strategic) behaviour. Only 14–31% of the participants choose actions in RTTC and RDA that are compatible with rational behaviour. Furthermore, by looking at the responses of those seemingly rational participants in control tasks, it becomes clear that most lack a basic understanding of the incentives of the game. We argue that the use of a default option, confusion and other behavioural biases account for the vast majority of truthful play in both TTC and DA in laboratory experiments. [ABSTRACT FROM AUTHOR]

In this letter, an incentive compatible contract is designed for purchasing energy and ancillary service (AS) simultaneously from strategic frequency regulation service providers (FRSPs) by considering information asymmetries between independent system operator and FRSPs. Here, AS is confined to frequency reserve (FR) for arresting nadir frequency following possible contingencies of the electrical grid. An FRSP has a multi-dimensional private information vector, which determines its operational cost and limitations. Moreover, there is a gaming opportunity for an FRSP that is arisen between energy and AS payments manifesting by manipulation of its bids. Thus, in this letter, a multi-object contract is designed by using the revelation principle to optimally allocate energy and FR among FRSPs. [ABSTRACT FROM AUTHOR]

Non-equilibrium models of choice (e.g. level- |$k$| reasoning) have significantly different, sometimes more accurate, predictions in games than does Nash equilibrium. When it comes to the maximal set of functions that are implementable in mechanism design, however, they turn out to have similar implications. Focusing on single-valued rules, we discuss the role and implications of different behavioural anchors (arbitrary level-0 play), and prove a level- |$k$| revelation principle. If a function is level- |$k$| implementable given any level-0 play, it must obey a slight weakening of standard strict incentive constraints. Further, the same condition is also sufficient for level- |$k$| implementability, although the role of specific level-0 anchors is more controversial for the sufficiency argument. Nonetheless, our results provide tight characterizations of level- |$k$| implementable functions under a variety of level-0 play, including truthful, uniform, and atomless anchors. [ABSTRACT FROM AUTHOR]

Game theory is an important analytical tool for measuring problems caused by behaviors that deviate from contractual ethics. However, the PPP literature still does little to explore this research topic. This paper analyzes and improves the equilibrium conditions of a renegotiation model of PPPs by introducing the asymmetry of information in the contract. To achieve this goal, the Mechanism Design Theory is used to demonstrate how the correct tracking of the investor directly influences the payoffs of the renegotiation. The study concludes that the lack of incentive constraints in the bidding document, as an ex ante condition, does not provide sufficient information on investor management capability. In this way, this information is only revealed in the renegotiation phase. Consequently, this contract failure results in high political costs to the government due to excessive subsidies. [ABSTRACT FROM AUTHOR]

In Bayesian mechanism we demonstrate the unicity and the stability of secure reversion protocols in which risk-averse players have no incentive to cheat or to deviate from the meditator’s recommendation and that can greatly improve their equilibrium expected payoffs as compared to those generated through correlation device. The main idea of this work is to show the ease with which we can compute the equilibrium expected payoffs for players. Furthermore, we emphasize those results through a numerical simulation for which the method is able to be used for empirical analysis. [ABSTRACT FROM AUTHOR]

We report on an experiment exploring whether and how subjects may learn to use a correlation device to coordinate on a correlated equilibrium of the Battle of the Sexes game which Pareto dominates the mixed-strategy Nash equilibrium of that game. We consider a direct correlation device with messages phrased in terms of players' actions as well as an indirect device with a priori meaningless messages. According to the revelation principle, it does not matter whether the correlation device is direct or indirect so long as it implements a correlated equilibrium. However, we find that subjects had an easier time coordinating on the efficient correlated equilibrium with a direct rather than an indirect device. Nevertheless, subjects were able to learn to use the indirect device to better coordinate their play. We further find that, when paired with a fixed partner, subjects utilized history-contingent strategies (e.g., 'alternation') as a coordinating device and were more likely to ignore the correlation device in this setting; the fixed-matching protocol can thus serve as a substitute for a correlation device in achieving an efficient coordination outcome. [ABSTRACT FROM AUTHOR]

The present paper studies the problem on multi-dimensional mechanisms in which the buyer's taste and budget are his private information. The paper investigates the problem by way of a canonical mechanism in the traditional one-dimensional setting: function of one variable, the buyer's taste. In our multi-dimensional context, this is an indirect mechanism. The paper characterizes the optimal canonical mechanism and shows that this approach loses no generality with respect to the direct (multi-dimensional) mechanism. [ABSTRACT FROM AUTHOR]

In open, anonymous settings such as the Internet, agents can participate in a mechanism multiple times under different identities. A mechanism is false-name-proof if no agent ever benefits from participating more than once. Unfortunately, the design of false-name-proof mechanisms has been hindered by a variety of negative results. In this paper, we show how some of these negative results can be circumvented by making the realistic assumption that obtaining additional identities comes at a (potentially small) cost. We consider arbitrary such costs and apply our results within the context of a voting model with two alternatives. [ABSTRACT FROM AUTHOR]

When an individual performs several tasks simultaneously, processing resources must be allocated to different brain systems to produce energy for neurons to fire. Following the evidence from neuroscience, we model the brain as an organization in which a coordinator allocates limited resources to the brain systems responsible for the different tasks. Systems are privately informed about the amount of resources necessary to perform their task and compete to obtain the resources. The coordinator arbitrates the demands while satisfying the resource constraint. We show that the optimal mechanism is to impose to each system with privately known needs a cap in resources that depends negatively on the amount of resources requested by the other system. This allocation can be implemented using a biologically plausible mechanism. Finally, we provide some implications of our theory: (i) performance can be flawless for sufficiently simple tasks, (ii) the dynamic allocation rule exhibits inertia (current allocations are increasing in past needs), and (iii) different cognitive tasks are performed by different systems only if the tasks are sufficiently important. [ABSTRACT FROM PUBLISHER]

We study an incomplete information mechanism design problem with three peculiarities. First, access to agents' private information is costly and unobservable. Second, the mechanism may communicate sequentially with the agents. Third, the mechanism designer and all the agents share a common interest. As an example one can think of N geologists that study the potential oil reserves in some tract. The geologists agree on the right course of action, given their N studies. However, carrying out the study may be costly for a geologist and so he may opt to fabricate a study. The oil company that employs these geologists need not contract them simultaneously and may, furthermore, choose to provide some of the results of early studies to geologists employed later on. Finally, the geologists and the oil company would like the joint study to forecast the quantity of oil reserves as accurate as possible. It turns out that, in such settings, what may not be implementable without communication becomes implementable with communication. Clearly, the possibility for sequential communication introduces a lot of complexity to the design problem. However, we provide a result in the spirit of the revelation principle and argue that whenever implementation is possible with communication it is also possible with a simple communication mechanism. Formally, we extend the model and results in Smorodinsky and Tennenholtz (Games Econ Behav 55(2):385-406, ) who consider the similar problem but restrict attention to symmetric social choice functions and IID distributions over the private information. [ABSTRACT FROM AUTHOR]

Most papers about trade credit in supply chain studied retailer's inventory policy based on information shared. Few papers paid attention to supplier's trade credit policy under asymmetric information. So this paper tries to propose supplier's optimal trade credit policy to reveal retailer's private information. The aim is achieved by developing an incentive model with revelation principle. The retailer's private information can be found out through this trade credit policy. This contract is more general than the wholesale price contract. For the retailer's private information, the order quantity and ratio of delay in payment are distorted. Sensitivity analysis shows that the contract is influenced by sales ability and discount rate. Finally, the indirect mechanism with the same effect is proposed to make it easy to be put into practice. [ABSTRACT FROM AUTHOR]

The central question in mechanism design is how to implement a given social choice function. One of the most studied concepts is that of truthful implementations in which truth-telling is always the best response of the players. The Revelation Principle says that one can focus on truthful implementations without loss of generality (if there is no truthful implementation then there is no implementation at all). Green and Laffont (Rev Econ Stud 53:447-456, 1986) showed that, in the scenario in which players' responses can be partially verified, the revelation principle holds only in some particular cases. When the Revelation Principle does not hold, non-truthful implementations become interesting since they might be the only way to implement a social choice function of interest. In this work we show that, although non-truthful implementations may exist, they are hard to find. Namely, it is NP-complete to decide if a given social choice function can be implemented in a non-truthful manner, or even if it can be implemented at all. This is in contrast to the fact that truthful implementability can be efficiently recognized, even when partial verification of the agents is allowed. Our results also show that there is no 'simple' characterization of those social choice functions for which it is worth looking for non-truthful implementations. [ABSTRACT FROM AUTHOR]

In the case of mechanism design with partial verification, where agents have restrictions on misreporting, the Revelation Principle does not always hold. Auletta et al. (J Auton Agent Multi-Agent Syst, to appear) proposed a characterization of correspondences for which the Revelation Principle holds, i.e., they described restrictions on misreporting under which a social choice function is implementable if and only if it is truthfully implementable. In this paper, we demonstrate that the characterization proposed in [1] is incorrect, and, building on their work, give a correct characterization. We also provide an example that demonstrates that our characterization is different from that of Auletta et al. [ABSTRACT FROM AUTHOR]

We consider a class of mechanism games in which there are multiple principals and three or more agents. For a mechanism game in this class, a sort of folk theorem holds: there is a threshold value for each of the principals such that an allocation is achieved at a pure-strategy sequential equilibrium of the game if and only if (i) it is incentive compatible and (ii) it attains an expected utility for each principal that is greater than or equal to the threshold value for the principal. [ABSTRACT FROM AUTHOR]

Consider the following puzzle: If earnings management is harmful to shareholders, why don’t they design contracts that induce managers to reveal the truth? To answer this question, we model the shareholders–manager relationship as a principal–agent game in which the agent (the manager) alone observes the economic outcome. We show that the limited liability (LL) of the agent, defined as the agent’s feasible minimum payment, might explain the demand for earnings management by the principal. Specifically, when the LL level is high (low), a contract that induces earnings management may be less (more) costly than a truth-revealing contract. This finding offers a new explanation of the demand for earnings management. [ABSTRACT FROM AUTHOR]

The paper analyzes a problem of optimal auction design when the seller faces asymmetrically informed bidders. Specifically, we consider a continuum of risk-neutral uninformed bidders taking part into the auction along with n risk-averse informed bidders. The contribution of the paper is threefold. First, we fully characterize the optimal auction in this non standard environment and in a very general set-up. We find that when informed bidders reveal “bad news” about the value of the good, the seller optimally awards the object to the uninformed bidders. Secondly, we show that the seller is better off in presence of uninformed bidders because this allows to lower the informational rents paid to the informed bidders. Last, we find that, with bi-lateral risk neutrality, the seller always awards the good to the uninformed bidders thereby keeping all the surplus. [ABSTRACT FROM AUTHOR]

This paper extends the revelation principle to environments in which the mechanism designer cannot fully commit to the outcome induced by the mechanism. We show that he may optimally use a direct mechanism under which truthful revelation is an optimal strategy for the agent. In contrast with the conventional revelation principle, however, the agent may not use this strategy with probability one. Our results apply to contracting problems between a principal and a single agent. By reducing such problems to well‐defined programming problems they provide a basic tool for studying imperfect commitment. [ABSTRACT FROM AUTHOR]

Abstract. This paper examines the implementability of social choice functions when only partial verification of private information is possible. Green and Laffont (1986) used this framework to derive a necessary and sufficient condition for the revelation principle to continue to hold with partial verification. We provide economically interesting characterizations of this condition, which suggest that it may be too restrictive. This leads us to consider implementation (not necessarily truthful) in general, when there is partial verification. We consider the case where compensatory transfers are allowed, giving the mechanism designer further leeway. We show how partial verification may allow efficient implementation of bilateral trade, where it would otherwise not be possible. [ABSTRACT FROM AUTHOR]

This paper provides a formal framework within which to study cooperative behavior in the presence of incomplete information, and shows how far the known results in the static cooperative game theory can readily be applied to the proposed framework. The new concepts of Bayesian society, Bayesian strong equilibrium and Bayesian incentive compatible strong equilibrium are introduced and studied. [ABSTRACT FROM AUTHOR]

Custom software development projects have special informational attributes that have challenged managers for many years: they are associated with information asymmetries regarding user valuation and developer costs, relationship-specific investments, and a resulting likelihood of positive externalities for the user or the developer from the other party's investment. Furthermore, in a custom project, market prices for software are not helpful in solving either the valuation or the cost problems. In this paper we analyze the unique nature of the software development agreements that can be reached between the user and the developer in such a setting. We compare the value of using internal and external developers, with the goal of better understanding the factors relevant to the outsourcing decision. For internal development, we derive a new mechanism that achieves the first-best system whenever the project has positive expected net value, while achieving ex ante budget balance. In contrast, the optimal mechanism for an external developer will not in general yield the first-best system. This implies that when internal and external developers have identical cost functions, internal development definitely yields the larger net value. More generally, this implies that an external developer must have considerable cost advantages over an internal developer in order to have the larger net value. Numerical results indicate that this difference in net values can be very large, as much as a 100% increase for internal development over external development. This is consistent with the strong bias in favor of internal custom development found in recent empirical studies. We also explain why the efficient levels of investment can be achieved only when there are no externalities, and we show that the presence of positive externalities results in underinvestment. Since using an external developer will typically yield a system that is not first-best, inefficient investments result with or without externalities. We present examples showing that uncertainty about system value is not a significant factor in choosing between internal and external development. However, uncertainty about the development costs is highly significant, with greater uncertainty making outsourcing less attractive. [ABSTRACT FROM AUTHOR]

In multidimensional bargaining situations where individuals possess relevant private information, say about preferences, allocational efficiency is a central concern. Even if there is no squabbling over distribution--for example, if contingent commitments on allocations can be made before private information is secured--honest revelation comes only by sacrificing efficiency. Indeed, the incentive-compatible, second-best outcomes generally require that some allocations be off the contract curve (ex post inefficient). The potential for recontracting, by ruling out such inefficient allocations and the second-best equilibria they support, would hurt matters further. [ABSTRACT FROM AUTHOR]