Bilateral Mechanism Design: Practical Contracting in Multi-Agency

Abstract

We modelize and investigate the analytical rationale of employing bilateral mechanism design, which simplifies collective mechanism design by ignoring relative information evaluation, in generalized multi-agency contracting games under Bayesian Nash equilibrium. We permit interdependent valuations, contract externalities, correlated types, and heterogeneous or different message sets of different agents. The delegation principle under Bayesian Nash equilibrium identifies that bilateral Bayesian mechanism design can be translated to delegated Bayesian menu design without loss of generality. We take advantage of interim-payoff-equivalence to provide economically interesting conditions on the primitives for the full equivalence in which bilateral mechanism design can be substituted for collective mechanism design. Our analysis can also incorporate individual rationality constraints. Moreover, we discuss the approximation of full equivalence and the case allowing primitive constraints across the contracts for different agents.

Keywords: multi-agency, Bayesian implementation, mechanism design, menu design, delegation principle

JEL Classification: C72, D82, D86