Information Design in Allocation with Costly Verification

Abstract

We study optimal information design on top of a single-object allocation problem with costly verification à la Ben-Porath et al. (2014). Agents learn private signals about the allocation payoff to the principal from signal distributions which are influenced by an information designer. The principal designs a mechanism to maximize her payoff based upon the designed information. We identify the agent-optimal information and the principal-optimal information. When there is only one agent, any agent-optimal information is principal-worst. When there are two or more agents, some agent-optimal information remains principal-worst; moreover, we characterize when agent-optimal information design strictly increases the probability of allocation. Finally, through identifying the principal-worst information, we obtain an optimal robust allocation mechanism for the principal.

Keywords: information design, mechanism design, costly verification, robust mechanism design

JEL Classification: D61, D82, D83