Renegotiation proof mechanism design with imperfect type verification
Theoretical Economics, July 2019. Issue 3, Vol. 14. Pages 971–1014
Abstract: I consider the interaction between an agent and a principal who is unable to commit not to renegotiate. The agent’s type affects only the principal’s utility. The principal has access to a public signal, correlated with the agent’s type, that can
be used to (imperfectly) verify the agent’s report. I define renegotiation-proof mechanisms and characterize the optimal one. The main finding of this paper is that the optimal renegotiation-proof mechanism induces pooling at the top, i.e., types above a certain threshold report to be the largest type, while types below the threshold report truthfully.
Keywords: Renegotiation proof, mechanism design, verification.
JEL classification: D8
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