MECHANISM DESIGN

December 7, 2015

1 Revelation Principle
N = 1, 2, .., n
i : type set for agent i
A mechanism is a game form < N, {Ai }iN,g > where g : A X Rn . In particular,
for direct revelation mechanism, you replace Ai s by i s.
Revelation Principle: Let < N, {Ai }iN , g > be a game form. If < N, {Ai }iN , g >
has a BNE {ai (i )}iN then there exists a DRM (x, t) = g(a ) where Ai = i for every
i, and there is a BNE of DRM where each agent reports her true type.
Proof: Let be a BNE of the game form < N, {Ai }iN,g >. Letting each agent
reporting a type, that is, 0 = (10 , ...n0 ) is the report profile. Define (x, t)(0 ) = g(a (0 ))
where a (0 ) = (a1 (10 ), ...a (n0 )n ). We need to show that i0 = i is a BNE of <
N, {i }iN,g >.
Fix i , the expected payoff of reporting the true type is given by,
EUi (i ) = Ei [ui (x(), t(), i , i )|i ] = Ei [ui (g(a ()), i , i )|i ]

(1)

maxai Ai EUi (i ) = Ei [ui (g(a ()), i , i )|i ] =

(2)

Definition: A DRM is incentive compatible in dominant strategies if truth telling is

a dominant strategy for every type of every other agent, i.e
ui (x(), t(), i , i ) ui (x(i0 , i ), t(i0 , i ), i , i )

(3)

for all

2 Vickery-Clark-Grows Mechanisms
VCG mechanisms implement ex-post efficiency outcome in dominant strategies.
x () argmaxx

N
X
i=1

Vi (x, i )

(4)

i.e x () is an expost efficient allocation.

=
t ()

j ) + i (i )
Vj (x (),

(5)

jxi

Proposition: The DRM {x (), t ()} defined above is incentive compatible in dominant strategies and is expost efficient.
Proof. x (.) is already expost eff., so we only need to show IC in dominant strategies.
Assume for a contradiction that for some agent i, agent finds it profitable to misreport
his type. Then,
Vi (x (i , i ), i ) +

j ) + i (i )
Vj (x (),

(6)

jxi

AAGV Mechanism Arrow-DApremont Gerard-Varet

2.1 Revenue Equivalence

1st price
G(x)E[Y1 Y1 x]

(7)