On the Informed Principal Model with Common Values

Abstract

In the informed principal model with common values, I provide conditions that allow for the characterisation of the set of equilibria of the game in which the principal makes a take-it-or-leave-it offer of a mechanism to the agent. I further examine if and when restriction to direct revelation mechanisms is without loss of generality. Last, I provide clear guidelines for solving economic applications, such as insurance, procurement, security design, and bilateral trading, of the informed principal model. The results are compared with and shown to significantly differ from those obtained
in Maskin and Tirole (1992).

Keywords: Mechanism Design; Informed Principal; Rothschild-Stiglitz-Wilson Allocation; Perfect Bayesian Equilibrium

JEL Classification: C72; D82