Renegotiation Proof Mechanism Design with Imperfect Type Verification
Theoretical Economics. Forthcoming
Abstract: I consider the interaction between an agent and a principal who is unable to commit not to renegotiate. The agent´s type only affects the principal´s utility. The principal has access to a public signal, correlated with the agent´s type, which can be used to (imperfectly) verify the agent´s report. I define renegotiation proof mechanisms and characterize the optimal one: there is pooling on top – types above a threshold report to be the largest type, while types below the threshold report truthfully – and no regret on top – the mechanism is sequentially optimal for the principal after the agent reports to be the largest type.
JEL classification: D8
Keywords: renegotiation proof, mechanism design, verification