Mechanism Design and Communication Costs

37 Pages Posted: 21 Mar 2002

See all articles by Raymond J. Deneckere

Raymond J. Deneckere

University of Wisconsin - Madison - Department of Economics

Sergei Severinov

Duke University, Fuqua School of Business-Economics Group

Date Written: September 2001

Abstract

This paper focuses on implementation issues in environments where it may be costly for the players to send certain messages. We develop an approach allowing to characterize the set of implementable outcomes in such environments, and then apply it to derive optimal mechanisms. The key elements of our approach are the absence of any restrictions on the communication structure in a mechanism and the ability of the principal to screen the agents not only on the basis of their preferences over the outcomes, but also on the basis of their communication abilities. A number of interesting implications for the monopoly regulation, signaling and screening is derived. In particular, we show that a monopoly may not want to exclude low-valuation consumers if some consumers in the population are not able to misrepresent their valuations, and why the employers may prefer to screen applicants via multiple rounds of interviews rather than via menus of contracts. Our findings also provide a justification for privacy laws.

Keywords: Mechanism design, implementation, costly communication, signaling, screening

JEL Classification: C72, D82

Suggested Citation

Deneckere, Raymond and Severinov, Sergei, Mechanism Design and Communication Costs (September 2001). Available at SSRN: https://ssrn.com/abstract=304198 or http://dx.doi.org/10.2139/ssrn.304198

Raymond Deneckere

University of Wisconsin - Madison - Department of Economics ( email )

1180 Observatory Drive
Madison, WI 53706
United States
608-263-6724 (Phone)
608-263-3876 (Fax)

Sergei Severinov (Contact Author)

Duke University, Fuqua School of Business-Economics Group ( email )

Box 90097
Durham, NC 27708-0097
United States
919-660-7926 (Phone)
919-660-7971 (Fax)

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