Optimal Stopping with Private Information
Université d'Évry - Departement de Mathematiques
Microsoft Corporation - Microsoft Research New England
May 6, 2014
Many economic situations are modeled as stopping problems. Examples include job search, timing of market entry decisions, irreversible investment or the pricing of American options. This paper analyzes optimal stopping as a mechanism design problem with transfers. We show that a under a dynamic single crossing condition a stopping rule can be implemented by a transfer that only depends on the realized stopping decision if and only if it is a cut-off rule. We characterize the transfer implementing a given stopping rule using a novel technique based on constrained stochastic processes.
As an application we prove that in any Markovian optimal stopping problem there exists a welfare maximizing mechanism that does not require any communication. We discuss revenue maximization for separable processes.
Number of Pages in PDF File: 34
Keywords: Dynamic Mechanism Design, Optimal Stopping, Dynamic Implementability, Posted-Price Mechanism
JEL Classification: D82, C62working papers series
Date posted: July 10, 2013 ; Last revised: May 8, 2014
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.438 seconds