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Renegotiation proof mechanism design with imperfect type verification

Francisco Silva.

Documento de Trabajo IE-PUC, N° 505, 2017

Abstract: I consider the interaction between an agent and a principal who is unable tocommit 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

 

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