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Mechanism design with limited commitment: Markov environments

Doval, Laura; Skreta, Vasiliki; (2024) Mechanism design with limited commitment: Markov environments. European Economic Review , 167 , Article 104777. 10.1016/j.euroecorev.2024.104777. Green open access

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Abstract

We provide a revelation principle for a class of single-agent dynamic mechanism design settings in which the agent's private information evolves stochastically over time and the designer can only commit to short-term mechanisms. We restrict attention to Markov environments, in which (i) the agent's type in period t+1 depends only on her period-t type and the period-t allocation, (ii) the designer's and the agent's payoffs are time-separable, and (iii) their period-t payoffs depend only on period-t type and the period-t allocation. We show all equilibrium payoffs can be attained with the designer using flow direct Blackwell mechanisms, which consist of a mapping from the agent's current type report to posterior beliefs about the current type, and a mapping from these beliefs to allocations. Furthermore, all equilibrium payoffs can be attained with strategies in which the agent participates and truthfully reports her type, and the beliefs that result from the mechanism correspond to the designer's equilibrium beliefs. This result greatly simplifies the search of optimal dynamic and sequentially rational mechanisms in dynamic mechanism design problems, which include dynamic Mirrlees and social insurance models.

Type: Article
Title: Mechanism design with limited commitment: Markov environments
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.euroecorev.2024.104777
Publisher version: https://doi.org/10.1016/j.euroecorev.2024.104777
Language: English
Additional information: © 2024 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
Keywords: Mechanism design, Limited commitment, Revelation principle, Direct blackwell mechanisms, Information design, Short-term mechanisms, Markov environments, Dynamic mechanism design
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery-pp.ucl.ac.uk/id/eprint/10200576
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