December 20 abstract we characterize decision rules which are implementable in mechanism design settings when, after the play of a mechanism, the uninformed party can propose a new mechanism. Auxiliary assumptions are placed either on the class of contracts the designer can choose from, as inmaestri2017 and strulovici2017, or on the length of the horizon, as inhart and tirole1988 andskreta 2006. We investigate what kind of equilibria of which mechanisms are renegotiation proof under a variety of renegotiation procedures, and which social choice functions can be implemented in a way that is renegotiation proof. For the contract to be renegotiation proof, therefore i has to be high enough so that the rent conceded counterbalances the efhciency gain of raising 112. Contrary to the case with constant types, the ex ante optimal contract may be renegotiation proof even if types are highly correlated. This is done by setting up a structure in which each player has an incentive to behave as the designer intends. The mirrlees approach to mechanism design with renegotiation. Posterior renegotiation proofness in a twoperson decision problem kei kawakamiy april 4, 2015. It is therefore possible for renegotiationproof equilibria to exhibit periodic breakdowns of. A mechanism is said to be renegotiation proof if it is robust against renegotiation both before and after it is played. The standard assumption in dynamic mechanism design is that the designer can commit to. We formalize and clarify the renegotiation proofness principle rpp. Renegotiationproof mechanism design with imperfect type. Hence, not all setups support a renegotiationproof mechanism, as the next canonical example demon.
Renegotiationaproof mechanism design with imperfect type. The mechanism design problem of a monopoly insurer faced with privately informed insurees. Asheim and tore nilsscn department of economics, university of oslo, n0317 oslo, norway received. I define renegotiation proof mechanisms and characterize the optimal one.
This paper considers a buyerseller relationship with observable but unverifiable investments andor random utility parameters. Ex post renegotiationproof mechanism design sciencedirect. It is assumed that the insurer cannot commit not to renegotiate by using the information that customer separation reveals before contracts are put into force. The renegotiation proofness principle and costly renegotiation jim brennan and joel watson. Van damme 3 has shown that, contrary to a claim made in early versions of those notes, cooperation in the repeated lrisoners dilemma is a renegotiation proof equilibrium for large enough discount factors. It is therefore possible for renegotiation proof equilibria to. Introduction normally, in mechanism design, the principal she uses the fact that the utility function of the agent he depends on his private type so as to be able to separate between. Normally, in mechanism design, the principal she uses the fact that the. The renegotiationproofness principle and costly renegotiation jim brennan and joel watson. The other side has common and known preferences over potential mates. Formally, c proposes an alternative mechanism at date 11 figure 3. Renegotiationproofness is not, however, an entirely satisfactorily concept. The mechanism design approach is used in applied settings by, among others, 28. Pdf renegotiation design with unverifiable information.
The former studies renegotiation and finds that equilibrium. Lectures on contract and mechanism design eth zurich, 18. A mechanism that is both interim and expost renegotiation proof is said to be renegotiation proof. In such situations, it is known that contract renegotiation may prevent the implementation of firstbest outcomes. Contract and mechanism design in settings with multi. We study contracting and costly renegotiation in settings of complete, but unverifiable information, using the mechanism design approach. This is the first simple, yet important, consequence of renegotiation proofness. In complete information environments with two agents only budget balanced groves allocations are eprp. Some definitions and results mechanism design is the science of designing rules of a game to achieve a specific outcome, even though each participant may be selfinterested. We characterize decision rules which are implementable in mechanism design settings when, after the play of a mechanism, the uninformed party can propose a new mechanism to the informed party. Posterior renegotiationproofness in a twoperson decision. We investigate what kind of equilibria of which mechanisms are ex post renegotiation proof eprp under a variety of ex post renegotiation procedures, and which social choice functions can be implemented in a way that is eprp. Contract and mechanism design in settings with multiperiod trade joel watson preliminary version, june 2005 current version, september 2005 abstract this paper presents analysis of contractual settings with complete but unveri. We study what kind of equilibria of which mechanisms are ex post renegotiation proof eprp, i.
Related literature the result described here is related to the work of watson 2004, 2007, which demonstrates that mechanism design theory needs to take account of the interaction between renegotiation opportunities and the technology of trade. Mechanism design and noncooperative renegotiation, cambridge working papers in economics 31, faculty of economics, university of cambridge. Chapter 2 classic mec hanism design mec hanism design is the sub eld of micro economics and game theory that considers ho w to implemen t go o d systemwide solutions to problems that in. We study a mechanism design problem under the assumption that renegotiation cannot be prevented. Preliminary draft, december 2001 complete version, may 2002 abstract we study contracting and costly renegotiation in settings of complete but unveri. The main focus of mechanism design is on on the design of institutions that satisfy certain objectives, assuming that the individuals interacting through the institution will act strategically and may hold. Group stability in matching with interdependent values. Renegotiationproof tenurial contracts as screening mechanisms.
In this setting, pairwise stability does not imply group stability. Whether or not a social choice rule is implementable may depend on which game theoretic solution concept is invoked. Optimality and renegotiation in dynamic contracting. Moreover, less is known beyond the binarytype case or a unitsale case. All these papers assume that the buyer can buy only one unit of the good, a single quality of the good is available, and utility functions are quasilinear. According to standard theory, the set of implementable outcome functions is reduced if the mechanism or contract can be renegotiated ex post. A mechanism is said to be renegotiation proof if it is robust against renegotation both before and after it is played. The mechanism design literature has investigated the implementation question for a variety of solution concepts. A read is counted each time someone views a publication summary such as the title, abstract, and list of authors, clicks on a figure, or views or downloads the fulltext. The large literature on renegotiation proof contracting is related but distinct. We ask 1 what kind of environments admit the renegotiation proof implementation of some social choice rules. Collusion can take eect at several points in the mechanism. Arbitration and renegotiation in trade agreements the. Mechanism design without commitment y university of york.
In some cases contracts can achieve nothing and so, for example, the holdup problem may be severe. This is the first simple, yet important, consequence of renegotiationproofness. Renegotiation proof mechanism design with imperfect type. Zvika neeman and gregory pavlov june 18, 2008 abstract a mechanism is said to be renegotiationproof if it is robust against renegotation both before and after it is played. That is, the mechanism may not be renegotiation proof. Lectures on contract and mechanism design eth zurich, 1821 october 2010 joel watson this series of lectures will survey some of the prominent concepts and issues in the recent contracttheory literature. Hence, not all setups support a renegotiation proof mechanism, as the next canonical example demon.
December 20 abstract we characterize decision rules which are implementable in mechanism design settings when, after the play of a mechanism, the uninformed party can propose a new mechanism to the informed party. Mechanism design and noncooperative renegotiation robert evans1 and s onje reiche2 this version. The main finding of this paper is that the optimal renegotiation. We show how renegotiation activity is best modeled in the fundamentals of the mechanism design framework, so that noncontractibility of renegotiation amounts to a constraint on the problem. Partitional information revelation under renegotiation. We study a mechanism design problem under the assumption that ex post renegotiation cannot be prevented. A mechanism is said to be renegotiationproof if it. For example, in private valuations environment it admits only ex post e. There is also a related literature in game theory that studies renegotiation proof equilibria but the focus is not on optimal game design. Contract and mechanism design in settings with multiperiod trade.
The literature about renegotiation proofness can thus be distinguished according to 1the literature on robust mechanism design has become quite voluminous. Our analysis indicates that to be robust to counterproposals, the. Citeseerx document details isaac councill, lee giles, pradeep teregowda. Renegotiation proof, mechanism design, verification. Pdf the mechanism design problem of a monopoly insurer faced with privately informed insurees is considered. Lecture notes mechanism design simon board and moritz meyertervehn october 27, 2011 1 introduction adverse selection agents have private information, their type i examples. A solution is offered by modeling renegotiation proofness in a framework inspired by greenbergs theory of social. Section 3 is devoted to the subject of renegotiation proofness under. We characterize the optimal renegotiation proof contract in a dynamic principalagent model in which the type of the agent may change stochastically over time. Seen in this light, the paper provides a strategic foundation for renegotiationproof contracts, as well as a dynamic implementation, without commitment, of e.
This mechanism is restricted by the same constraints as in the main mechanism design problem, namely, incentive compatibility and renegotiation proof constraints. Mechanism design without commitment university of york. The mechanismdesign approach is used in applied settings by, among others, 28. This research report is available as a downloadable pdf file on our. The main finding of this paper is that the optimal renegotiationproof mechanism induces pooling at the top, i. Renegotiationproof mechanism design with imperfect type verification. First consider the setting in which the players cannot renegotiate. The proof builds on the following lemma, which provides a more convenient characterization of implementability. The goal is to design economic mechanisms or incentives to implement desired objectives social or individual in a strategic settingassuming that the di. In the next 3 lectures, we will study mechanism design, which is an area in economics and game theory that has an engineering perspective. Relevant tools in bargaining and mechanism design theory will also be covered, and a few applications will be discussed. Hurwicz 1972 also introduced the fundamental notion of incentive compatibility. Ex post collusion or renegotiation takes place after the mechanism has identi.
Mechanism design with renegotiation and costly messages. There, the focus is on contracts that involve renegotiation proof mechanisms. Contract and mechanism design in settings with multiperiod trade joel watson preliminary version, june 2005. The necessary and sufficient conditions are, essentially, that the rule be implementable with commitment, that for each type the decision is at least as high as if there were no mechanism. The most demanding requirement is that each agent should have a dominant strategy. A strategic foundation for renegotiationproof contracts.
Renegotiationproof mechanism design zvika neeman and gregory pavlov. We show that ex post renegotiation proof equilibria always result in ex post efficient outcomes, and that for the case of three or more agents every ex post efficient social choice function can be implemented in a way that is ex post renegotiation proof by a simple mechanism that requires two agents to report the state of the world and. The theory of mechanism design takes a systematic look at the design of institutions and how these a. In this paper, we show however that efficient investments and optimal risksharing can typically be achieved provided the initial contract is able to. In the next section, we present the basic set up of our model. The main finding of this paper is that the optimal renegotiation proof mechanism induces pooling at the top, i. While i start by characterizing the optimal incentive compatible ic mechanism, the main contribution of the paper is to define renegotiationproof rp. Essentially, one must perform a mechanism design analysis for. As before, some mechanism design environments may not permit the implementation of any social choice function in a way that is ex post renegotiation proof.
We study twosided manytoone matching markets with interdependent valuations and imperfect information held by one side of the market. Renegotiation in repeated games new york university. Renegotiation proofness is not, however, an entirely satisfactorily concept. The theory of mechanism design provides an analytical framework for the design. The mechanism design problem of a monopoly insurer faced with privately informed insurees is considered. Zvika neeman and gregory pavlov june 18, 2008 abstract a mechanism is said to be renegotiation proof if it is robust against renegotation both before and after it is played. In this paper we study mechanism design with renegotiation and incomplete information.
There is no renegotiation proof mechanism that employs the english feeshifting rule including mechanisms that do not satisfy deterrence that gives to the plaintiff, a liable, and a nonliable defendant expected payoffs that are greater than or equal to p. In effect, the inventor should be given the authority to determine if his project should be implemented or not. Zvika neeman and gregory pavlov october 16, 2007 abstract a mechanism is said to be renegotiationproof if it is robust against renegotation both before and after it is played. For longer games, the cyclical path builds itself up again, just as outlined above. The renegotiationproofness principle and costly renegotiation. The optimality of arms length, memoryless contracts. It has been argued by many authors that renegotiation proofness is a robustness property that it is desirable for a mechanism to possess.
490 732 887 451 190 892 332 422 374 1437 82 210 327 381 1164 1376 391 1457 1374 1466 836 215 1381 700 968 491 675 780 393 1071 69 24 606 548 555 1111