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Implementation with Securities

Author

Listed:
  • Rahul Deb
  • Debasis Mishra

Abstract

We study mechanism design in a setting where agents know their types but are uncertain about the utility from any alternative. The final realized utility of each agent is observed by the principal and can be contracted upon. In such environments, the principal is not restricted to using only transfers but can employ security contracts which determine each agent's payoff as a function of their realized utility and the profile of announced types. We show that using security contracts instead of transfers expands the set of (dominant strategy) implementable social choice functions. Our main result is that in a finite type space, every social choice function that can be implemented using a security contract can also be implemented using a royalty contract. Royalty contracts are simpler and commonly used security contracts, in which agents initially pay a transfer and keep a fraction of their realized utility. We also identify a condition called acyclicity that is necessary and sufficient for implementation in these environments.

Suggested Citation

  • Rahul Deb & Debasis Mishra, 2013. "Implementation with Securities," Working Papers tecipa-484, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:tecipa-484
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    References listed on IDEAS

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    Cited by:

    1. Tymofiy Mylovanov & Andriy Zapechelnyuk, 2017. "Optimal Allocation with Ex Post Verification and Limited Penalties," American Economic Review, American Economic Association, vol. 107(9), pages 2666-2694, September.

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    More about this item

    Keywords

    dominant strategy implementation; acyclicity; security contracts; royalty contracts; cycle monotonicity;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D71 - Microeconomics - - Analysis of Collective Decision-Making - - - Social Choice; Clubs; Committees; Associations
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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