A Mediator Approach to Mechanism Design with Limited Commitment

Abstract

We study mechanism design with limited commitment. In each period, a principal offers a "spot" contract to a privately informed agent without committing to future contracts. In contrast to the classical model with a fixed information structure, we allow for all admissible information structures. We represent the information structure as a fictitious mediator and re-interpret the model as a mechanism design problem for the committed mediator. We construct examples to explain why new equilibrium outcomes can arise when considering general information structures. Next, we apply our approach to durable-good monopoly. In the seller-optimal mechanism, trade dynamics and welfare substantially differ from those in the classical model: the seller offers a discount to the high-valuation buyer in the initial period, followed by the high surplus-extracting price until an endogenous deadline, when the buyer's information is revealed without noise. The Coase conjecture fails. We also discuss unmediated implementation of the seller-optimal outcome.

Keywords: Mechanism Design, Limited Commitment, Information Design, Communication Equilibrium, Durable-Good Monopoly, Coase Conjecture

JEL Classification: C7, D4, D8