Dynamic mechanism design: A myersonian approach

Alessandro Pavan, Ilya Segal, Juuso Toikka

Research output: Contribution to journalArticlepeer-review

123 Scopus citations

Abstract

We study mechanism design in dynamic quasilinear environments where private information arrives over time and decisions are made over multiple periods. We make three contributions. First, we provide a necessary condition for incentive compatibility that takes the form of an envelope formula for the derivative of an agent's equilibrium expected payoff with respect to his current type. It combines the familiar marginal effect of types on payoffs with novel marginal effects of the current type on future ones that are captured by "impulse response functions." The formula yields an expression for dynamic virtual surplus that is instrumental to the design of optimal mechanisms and to the study of distortions under such mechanisms. Second, we characterize the transfers that satisfy the envelope formula and establish a sense in which they are pinned down by the allocation rule ("revenue equivalence"). Third, we characterize perfect Bayesian equilibrium-implementable allocation rules in Markov environments, which yields tractable sufficient conditions that facilitate novel applications. We illustrate the results by applying them to the design of optimal mechanisms for the sale of experience goods ("bandit auctions").

Original languageEnglish (US)
Pages (from-to)601-653
Number of pages53
JournalEconometrica
Volume82
Issue number2
DOIs
StatePublished - Mar 2014

Keywords

  • Asymmetric information
  • Envelope theorems
  • Incentives
  • Mechanism design
  • Stochastic processes

ASJC Scopus subject areas

  • Economics and Econometrics

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