Optimal Dynamic Mechanism Design and the Virtual Pivot Mechanism
University of Pennsylvania - Statistics Department
New York University (NYU)
University of Southern California - Marshall School of Business
We consider the problem of designing optimal mechanisms for settings where agents have dynamic private information. We present the Virtual-Pivot Mechanism, that is optimal in a large class of environments that satisfy a separability condition. The mechanism satisfies a rather strong equilibrium notion (it is periodic ex-post incentive compatible and individually rational). We provide both necessary and sufficient conditions for immediate incentive compatibility for mechanisms that satisfy periodic ex-post incentive compatibility in future periods. The result also yields a strikingly simple mechanism for selling a sequence of items to a single buyer. We also show the allocation rule of the Virtual-Pivot Mechanism has a very simple structure (a Virtual Index) in multi-armed bandit settings. Finally, we show through examples that the relaxation technique we use does not produce optimal dynamic mechanisms in general non-separable environments.
Number of Pages in PDF File: 26
Keywords: optimal mechanism design, dynamic mechanism design, dynamic private information
JEL Classification: D82, C73
Date posted: March 10, 2011 ; Last revised: February 14, 2014
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