Journal of Mathematical Economics 106 (2023) 102831

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Journal of Mathematical Economics

journal homepage: www.elsevier.com/locate/jmateco

Mechanism design with general ex-ante investments✩ , ✩✩

∗
Hitoshi Matsushima 1 , Shunya Noda
University of Tokyo, Japan

article info a b s t r a c t

Article history: We investigate mechanism design problems wherein agents take hidden actions that affect the state
Received 11 August 2022 distribution. As agents’ action space expands, the set of mechanisms that yields a targeted action
Received in revised form 18 February 2023 profile reduces. When agents can choose from various actions to change the state distribution in full-
Accepted 22 February 2023
dimensional directions, the payment rule that induces a targeted action profile along with a given
Available online 26 February 2023
allocation rule becomes unique up to a constant. We subsequently utilize this characterization result
Keywords: to examine efficient mechanism design and demonstrate that the pure-VCG mechanism, the most basic
Hidden action form of the canonical VCG mechanism, is the only mechanism that produces an efficient action profile
Hidden information when agents can choose from various actions. Contrarily, the widely used pivot mechanism frequently
VCG-necessity fails to induce an efficient action profile as long as an agent’s action impacts the private types of other
Equivalence agents, even if the agent’s action space is one-dimensional.
© 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license
(http://creativecommons.org/licenses/by/4.0/).

1. Introduction not be publicly observable. In such environments, an ideal mech-

In many real-world allocation problems, agents have oppor-
tunities to take ex-ante actions, such as acquiring information,
conducting research and development, engaging in environmen-
tal protection, controlling patents, standardizing, merging and
acquiring, engaging in rent-seeking activities, launching posi-
tive/negative campaigns, differentiating products, making en-
try/exit decisions, preparing infrastructure, and recruiting. These
actions affect the state of the world in various ways. Additionally,
the optimal actions of agents depend on the mechanism design
for determining the allocation, while agents’ ex-ante actions may
✩ This paper supersedes ‘‘Mechanism Design in Hidden Action and Hidden
Information: Richness and Pure-VCG.’’ This study has been supported by Grant-
in-Aid for Scientific Research (KAKENHI 25285059, 26J10076, 16H02009) from
the Japan Society for the Promotion of Science (JSPS) and the Ministry of
Education, Culture, Sports, Science and Technology (MEXT) of the Japanese
government, the Funai Overseas Scholarship, the E.K. Potter Fellowship, the
JSPS Research Fellowship (DC1), and the CARF Research Fund of the University
of Tokyo. We thank Gabriel Carroll, Philippe Jehiel, Fuhito Kojima, Benny
Moldovanu, Julia Salmi, Takuo Sugaya, and Yuichi Yamamoto, and seminar
participants at Hitotsubashi University, University of Tokyo, Osaka University,
Kyoto University, Stanford University, Seoul National University, and Waseda
University. All errors are ours.
✩✩ Manuscript handled by Editor: Carmen Bevia.
∗ Correspondence to: Graduate School of Economics, University of
Tokyo, Bunkyo-ku, Tokyo, Japan.
E-mail addresses: hitoshi@e.u-tokyo.ac.jp (H. Matsushima),
shunya.noda@e.u-tokyo.ac.jp (S. Noda).
1 Graduate School of Economics, University of Tokyo, Bunkyo-ku, Tokyo,
Japan.
anism should resolve not only the issue of hidden information
(i.e., to incentivize truthful reporting of agents’ private informa-
tion) but also the problem of hidden actions (i.e., to induce a
targeted action profile that leads to a desirable state distribution)
to produce an intended outcome.
This paper investigates a broad range of mechanism design
problems in which both a hidden action problem and a hidden
information problem coexist. Initially, agents take ex-ante actions
(or investments) that determine the probability distribution over
the state. Following the realization of the state, the mechanism
determines the allocation and payment in a state-contingent
manner. Neither actions nor states (i.e., agents’ private types) are
assumed to be observable. As a result, the central planner must
meticulously design a mechanism to (i) induce the targeted action
profile to produce a targeted state distribution (i.e., the targeted
action profile becomes a Nash equilibrium of the game implied
by the mechanism), and (ii) incentivize the truthful reporting of
agents’ private types to implement the targeted allocation rule.
Our aim is to characterize how the variety of agents’ actions
limits the set of mechanisms that induce a targeted action profile.
The variety of an agent’s action space is measure by the dimen-
sion of the state distributions that the agent can achieve through
a unilateral deviation, which we term the dimension of the action
space. We identify a tradeoff between the dimensionality of the
action space and the dimensionality of the set of well-behaved
mechanisms: as the dimensionality of the action space increases
by one, the upper bound of the dimensionality of the set of
payment rules inducing the targeted action profile decreases by
one (Theorem 1). Notably, if the agent gains the ability to make a
slight change in the state distribution in a different direction at a

https://doi.org/10.1016/j.jmateco.2023.102831
0304-4068/© 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
H. Matsushima and S. Noda
small cost, then nearly all payment rules that were well-behaved
with the initial action set cannot induce the targeted action pro-
file. This means that the set of well-behaved payment rules with
the new (larger) action set has a zero measure relative to the set
of well-behaved payment rules with the old (smaller) action set.
As a result, an opportunity to undertake hidden actions imposes
a significant restriction on the well-behaved mechanisms’ class.
We subsequently establish a theorem of uniqueness for cases
where action spaces are large. An action space is considered to
be rich if an agent can unilaterally alter the state distribution
in full-dimensional directions. The payment rule that induces a
targeted action profile along with a given allocation rule becomes
unique up to a constant (Corollary 1). This theorem implies that
there will be no degree of freedom for designing a payment rule
for other objectives, such as incentivizing truthful reporting of
private information. This concept is a novel interpretation of the
‘‘revenue-equivalence principle’’, which extends Theorem 3 of
Holmström and Milgrom’s (1987) work (originally proven for a
principal–agent problem) to a mechanism design problem.
The results of our characterization have implications for a
number of previous studies on efficient mechanism design re-
garding hidden action and information problems. Firstly, we
demonstrate that the widely-used pivot mechanism (originally
proposed by Green and Laffont in 1979), which seeks to align
an agent’s payoff with their marginal contribution to social wel-
fare, frequently fails to induce efficient actions (Proposition 2)
when agents have the ability to influence other agents’ type
distributions. This phenomenon can be attributed to the fact that
each agent is tempted to exaggerate their marginal contribution
by increasing the likelihood of their participation being impor-
tant for social welfare. This can be achieved, for instance, in an
auction setting, by decreasing other agents’ value for the item
being auctioned. Our finding generalizes the observation made
by Krähmer and Strausz in 2007, which pertained to the case of
a one-dimensional investment space.
In addition, we present a characterization of fully efficient
mechanisms for rich action spaces. Previous studies by Krähmer
and Strausz (2007) and Athey and Segal (2013) demonstrate that,
unlike the pivot mechanism, the pure-VCG mechanism always
induces an efficient action profile. The pure-VCG mechanism,
which is a basic type of the canonical Vickrey–Clarke–Groves
(VCG) mechanisms,2 grants each agent the welfare of the other
agents and then charges a fixed monetary fee. Our new finding
shows that pure-VCG is a necessary mechanism to induce an
efficient action profile. If the action space is sufficiently large,
any mechanism other than pure-VCG fails to induce an efficient
action profile. Therefore, for rich action spaces, pure-VCG is the
unique mechanism that can induce an efficient action profile
(Theorem 2).
Finally, we extend our analysis to an environment with in-
dependent types, where the influence of each agent’s action is
limited to their own type distribution. Despite this restriction, the
range of mechanisms that can solve the hidden action problem is
still limited due to the variety of available actions. Using a large
action space assumption, we derive a characterization theorem
(Theorem 3) showing that all payment rules inducing a targeted
action profile are interim equivalent (i.e., expectations conditional
on private information is the same), rather than ex-post. We
also establish that a mechanism induces an efficient action pro-
file if and only if it is the expectation-VCG mechanism, where
each agent’s interim expected payment is equal to that from a
2 Vickrey (1961), Clarke (1971), and Groves (1973).
2
Journal of Mathematical Economics 106 (2023) 102831
VCG mechanism (Corollary 2).3 Our results complement previous
studies by Rogerson (1992), Bergemann and Välimäki (2002), and
Hatfield et al. (2014), which demonstrated that (expectation-)
VCG mechanisms can achieve full efficiency with independent
types.
The rest of the manuscript is structured as follows. Section 2
reviews the literature. Section 3 describes the model. Section 4
studies the hidden action problem. Section 5 studies an efficient
mechanism design. Section 6 considers the case without exter-
nality and compares the result with those of previous works.
Section 7 concludes.
2. Literature review
Several papers have highlighted the advantages of using sim-
ple contracts in complex situations. For example, Holmström and
Milgrom (1987) investigate the moral hazard problem using a
principal–agent model and demonstrate that, in the case where
the agent’s set of actions is sufficiently large, there is a solitary
contract that leads to the desired level of effort. Carroll (2015) es-
tablishes that when the principal confronts uncertainty regarding
the range of activities, the optimal robust contract must be linear
in the resulting output. This article considers a broad range of
mechanism design problems, of which the principal–agent model
is a specific example. We demonstrate how a large action space
limits the range of desirable mechanisms and propose a condition
under which the mechanism that achieves the targeted action is
unique, except for a constant factor.
The literature has also demonstrated that in cases where the
action spaces are limited, we can design incentive mechanisms
that are efficient by customizing the payment rule to detailed
specifications. This can even lead to full surplus extraction or
budget balance, as demonstrated in works by Matsushima (1989),
Legros and Matsushima (1991), Williams and Radner (1995), and
Obara (2008). However, as our Corollary 1 demonstrates, when
agents can take various actions, the mechanism’s dependence on
detail tempts each agent to deviate. We not only study the case
with extremely large or extremely small action spaces but also
intermediate ones. Specifically, our Theorem 1 shows that even
if the dimension of agents’ action space is substantially smaller
than the dimension of the set of state distributions, the set of
mechanisms inducing targeted actions is small.
It is well-known that when the state space is ‘‘large’’, the set
of incentive-compatible mechanisms becomes ‘‘small’’. Green and
Laffont (1977, 1979) and Holmström (1979) show that in hid-
den information environments with differentiable valuation func-
tions, differentiable path-connectedness, and private values, VCG
mechanisms are the only efficient mechanisms. This study recon-
siders VCG mechanisms from the viewpoint of the hidden action
problems and shows that only pure-VCG mechanisms, which are
special cases of VCG, can induce an efficient action profile.4 In this
sense, our result is a new version of the VCG-necessity theorem,
which characterizes the set of action spaces under which the
pure-VCG mechanism becomes the unique efficient mechanism.
3 Matthews (1984), Hausch and Li (1991), and Tan (1992) show that the
first- and second-price auctions provide each agent with the same incentive in
hidden action in symmetric environments, in which the first-price auction is
an indirect implementation of an expectation-VCG mechanism, and the second-
price auction is equivalent to the pivot mechanism. Tan (1992), Stegeman (1996),
and Arozamena and Cantillon (2004) also show that, with private values, the
second-price auction (the pivot mechanism) induces an efficient hidden action.
This study provides a comprehensive understanding of these previous works.
4 Hausch and Li (1993) and Persico (2000) are relevant to this point.
They illustrate that in cases where values are affiliated, first- and second-
price auctions provide diverse incentives to acquire more precise information
regarding one’s own value and, consequently, more information regarding the
valuations of others. This study establishes that the disparity in the resulting
action profile arises from the discrepancy in the ex-post payoffs between these
auction formats.
H. Matsushima and S. Noda
3. Model
Consider a setting with one central planner and n agents
indexed by i ∈ N = {1, 2, . . . , n}. The central planner commits to
a mechanism at the beginning. Observing the committed mech-
anism, agents choose ex-ante actions that determine the state
distribution. After observing the realized private types, agents
participate in the mechanism and report their private types.
In the following, we specify the ‘‘game’’ more concretely. In
the beginning, the central planner commits to a mechanism.
Stage 1: The central planner commits to a mechanism defined as
(g , x), where Ω denotes the set of states, A denotes the set of
allocations, g : Ω → A, and x ≡ (xi )i∈N : Ω → Rn . We assume that
Ω and A are finite. We call g and x the allocation rule and payment
5
rule, respectively.
For each i ∈ N, we call a pair of an allocation rule and a
payment rule for agent i (i.e., (g , xi )) a mechanism for agent i.
Slightly abusing notation, xi is sometimes regarded as a |Ω |-
dimensional vector (i.e., xi = (xi (1), . . . , xi (|Ω |)) ∈ R|Ω | ). We also
denote x = (x1 , . . . , xn ) = (xi (ω))i∈N ,ω∈{1,...,|Ω |} ∈ Rn|Ω | .
Observing the mechanism, agents choose an action privately.
For example, if the allocation problem is a procurement auction,
agents can invest for facilities or hire/fire employees. Actions
incur some costs (specified later).
Stage 2: Each agent i ∈ N selects a hidden action bi ∈ Bi , where Bi
denotes the set of all actions for agent i. The cost function of agent
i′ s action choice is given by ci : Bi → R+(. We
) assume that there is
a no-effort option b0i ∈ Bi such that ci b0i = 0. Let B ≡ ×i∈N Bi
and b ≡ (b1 , . . . , bn ) ∈ B.
The action profile determines the state distribution. In the
procurement auction example, firms’ (agents’) cost for supplying
good or service depend on their equipment and human resources.
Stage 3: The state ω = (ω0 , ω1 , . . . , ωn ) is randomly drawn from
the probability function f (·|b) ∈ ∆(Ω ), where b ∈ B is the action
profile selected at Stage 2. We call ω0 a public signal and ωi a type
for each agent i ∈ N. We denote the set of all public signals by
Ω0 and the set of all types of agent i by Ωi . Let Ω ≡ ×i∈N ∪{0} Ωi ,
and Ω−i ≡ ×j∈N ∪{0}\{i} Ωj . Agent i observes her type ωi and public
signal ω0 . However, she cannot observe ω−i at this stage.
The action profile jointly determines the distribution of the
state, which is defined as a profile of all agents’ types. In this
sense, our model allows an agent’s actions to have externalities,
i.e., to influence the other agents’ types. We discuss how the
conclusion changes when we assume each agent’s action only
changes the agent’s (marginal) type distribution in Section 6.
Finally, the central planner runs the mechanism that was
announced in Stage 1. Without loss of generality, we focus on
direct revelation mechanisms, and agents simultaneously report
their types to the central planner.6
Stage 4: Each agent i ∈ N reports ω̃i ∈ Ωi about her type.
Afterward, all agents, as well as the central planner, observe the
public signal ω0 . According to the profile of the agents’ reports
ω̃−0 = (ω̃i )i∈N and the observed public signal ω0 , the central
5 This study assumes that the central planner commits to the mechanism
before agents take actions. Without the assumption of commitment, the desired
outcomes, such as efficiency, may be unachievable due to time inconsistency:
The central planner wants to induce a targeted action profile ex-ante, whereas
she wants to use a different mechanism once an action profile is fixed. To avoid
this complexity, we assume that the central planner’s mechanism choice is made
in the very beginning of the game.
6 See Proposition 1 in Obara (2008). Obara (2008) argues that, if the central
planner attempts to induce a mixed action profile, we need to consider
mechanisms in which each agent reports not only her type but also her selection
of pure action.
3
Journal of Mathematical Economics 106 (2023) 102831
planner determines the allocation g(ω0 , ω̃−0 ) ∈ A and the side
payment vector x(ω0 , ω̃−0 ) ∈ Rn . The resultant payoff of agent i is
given by
vi (g (ω0 , ω̃−0 ) , ω) − xi (ω0 , ω̃−0 ) − ci (bi ) .
Here, we assume that each agent’s payoff function is quasi-
linear and risk-neutral, and the cost of the agent’s action choice
is additively separable.
4. Characterization
4.1. Inducibility
We first characterize the mechanism that induces a targeted
action profile, assuming that all agents truthfully report the state
ω = (ω0 , ω1 , . . . , ωn ) in Stage 4. We say that a mechanism
induces an action profile if each agent can maximize her expected
payoff by taking the action, where the expectation is taken with
respect to the state distribution associated with the action choice.
Definition 1 (Inducibility). A mechanism for agent i, (g , xi ), induces
agent i’s action bi given b−i if bi is a best response to b−i , i.e., for
all b′i ∈ Bi ,
E [vi (g (ω) , ω) − xi (ω) |b] − ci (bi )
≥ E vi (g (ω) , ω) − xi (ω) |b′i , b−i − ci b′i ,
[ ] ( )
where E [·|b] denotes the expectation operator given that action
profile b is taken: For every function ξ : Ω → R, E [ξ (ω)|b] is
defined as follows:
∑
E [ξ (ω)|b] ≡ ξ (ω) f (ω|b) .
ω∈Ω
A mechanism (g , x) induces an action profile b if (g , xi ) induces
bi given b−i for every i ∈ N, i.e., b is a Nash equilibrium of the
game implied by the mechanism (g , x).
Define Xi (b, g ) as the set of all of agent i’s payment rules that
induce the targeted action bi given b−i along with the allocation
rule g. Formally,
Xi (b, g ) ≡ x̃i ∈ R|Ω | : (g , x̃i ) induces bi given b−i .
{ }
Xi (b, g ) is nonempty if and only if there is a function ui : Ω →
R such that
bi ∈ argmax E ui (ω)| b′i , b−i − ci b′i
{ [ ] ( )}
b′i ∈Bi
In other words, if the planner has an objective function (such
as social welfare) to maximize and b is an optimal solution,
then Xi (b, g) is nonempty. Hereafter we focus on (b, g) such that
Xi (b, g) is nonempty for every i ∈ N.
We will characterize the relationship between the largeness
of Bi and the smallness of Xi (b, g ) by their dimensionality. The
dimension of a vector space L ⊂ Rh , denoted by dim L, is defined
as a cardinality of a basis of L. The dimension of a set L′ ⊂ Rh ,
denoted by dim L′ , is defined as the minimal dimension of vector
spaces containing L′ .
4.2. Example
To illustrate our characterization, we first focus on a simple
example, where the central planner wants agent(s) to complete a
research project successfully. For brevity, we assume that agents
have no interest in allocation itself, i.e., v (a, ω) = 0 for all a ∈ A
and ω ∈ Ω , so that we can focus on whether a payment rule can
induce a targeted action. The outcome space is threefold, Ω =
{1, 2, 3}, and the realizations represents ‘‘fail’’, ‘‘small success’’,
and ‘‘big success’’, respectively. While f : Ω → R is originally
H. Matsushima and S. Noda
Fig. 1. Timeline.
defined as a function where f (ω) represents the probability that
the state ω realizes, slightly abusing notation, we sometimes
regard f as a |Ω |-dimensional vector, f = (f (ω))ω∈Ω . Specifi-
cally, every state distribution f lies in a two-dimensional simplex,
i.e., ∆ (Ω ) = ∆2 = f ∈ [0, 1]3 : f (1) + f (2) + f (3) = 1 .
{ }
We start from the case of a single agent (n = 1), and we
drop subscripts denoting the agent for visibility. Since this single-
agent’s action solely determines the state distribution, the agent’s
action space, B, is equivalent to the set of achievable state distri-
butions, F ⊂ ∆2 . While we discuss the single-agent example, we
denote the agent’s action as a state distribution, f ∈ F .
One-agent, one-dimensional action. We first consider a one-
dimensional action space, F = f ∈ ∆2 : f (1) = 1/3 . In words,
{ }
by exerting effort, the agent can turn a small success (ω = 2) to
a big success (ω = 3) but cannot decrease the probability of a
failure. The agent’s cost function is specified by c (f ) = (f (3))2 ,
meaning that it is costly to increase the chance of a big success.
Suppose that the central planner wants to induce f ∗ such that
f ∗ (1) = f ∗ (2) = f ∗ (3) = 1/3. A payment rule x ∈ R3 induces f ∗
if and only if f ∗ is a solution of the following utility maximization
problem:
{ ( ) }
1 2
max x (1) + − f (3) x (2) + f (3) x (3) − (f (3))2
3 3
[ ]
f (3)∈ 0, 32
Since the payoff from the payment rule is linear in f and the
cost function is assumed to be differentiable, the agent’s opti-
mal choice of the action, f (3), is characterized by the following
first-order condition:
− x (2) + x (3) − 2f (3) = 0.
Accordingly, the payment rule induces f ∗ , i.e., f (3) = 1/3, if and
only if
2 characterize the set of state distributions that can be achieved by
x (3) − x (2) = . (1)
3 agent i’s unilateral deviation as follows:
The agent can control the ratio of f (2) and f (3). If (1) is not
satisfied, the agent would want to increase or decrease f (3) to
obtain a better payoff. By contrast, since the agent cannot change
f (1), the central planner can choose any value for x (1). Here,
the agent’s ability to control the ratio of f (3) to f (2), which can
be represented as a one-dimensional action space, decreases the
dimension of the set of payment rules that induce the targeted
action by one.
One-agent, two-dimensional action. Now, we instead consider
a two-dimensional action space, F = ∆2 . Different from the
previous case, the agent can decrease the probability of a failure,
f (1), by exerting effort. We specify the cost function by c (f ) =
(1 − f (1))2 + (f (3))2 . For a payment rule x to induce f ∗ ≡ 1/3,
f ∗ must be a solution of the following problem:
f (1) x (1) + (1 − f (1) − f (3)) x (2)
{
max
f (1),f (3)
4
Journal of Mathematical Economics 106 (2023) 102831
+f (3) x (3) − (1 − f (1))2 − (f (3))2
}
Similar to the case of the one-dimensional action space, we can
obtain a necessary condition for a payment rule to induce f ∗ using
the first-order condition. The resultant condition is (1) and
4
x (2) − x (1) = . (2)
3
As before, the agent can control the ratio between f (2) and
f (3). To prevent the agent from making such a deviation, (1)
must be the case. Now, in addition, the agent can control the ratio
between f (1) and f (2). To prevent this new class of deviations,
the payment rule must satisfy an additional constraint, (2). The
two constraints, (1) and (2), uniquely specifies the payment rule
up to constant: When x (1) = ȳ, then x (2) = 4/3 + ȳ and
x (3) = 2 + ȳ must be the case.
The observations above do not rely on the assumptions made
for simplicity. When the agent’s valuation for allocations, v (a, ω),
is not a constant, we can replace x (ω) of the above argument
with v (a, ω) + x (ω) and then all the arguments go through
without any modifications. As long as the cost function c is differ-
entiable, the first-order condition becomes a necessary condition
for optimality. Since the agent’s payoff is linear in payments, each
necessary condition appears as a linear constraint on the set of
inducible payment rules. Furthermore, the number of the first-
order conditions is equal to the number of directions to which
the agent can shift the state distribution. Accordingly, for a single-
agent problem, the dimension of payment rules that induce a
targeted action (state distribution) can be characterized by the
dimension of the set of state distributions the agent can choose
from.
Multiple agents. In a multiple-agent case, the state distribution
is associated with an action profile, rather than a single agent’s
action. However, once we fix the other agents’ actions b−i , we can
{ }
Fi (b−i ) = f˜ ∈ ∆ (Ω ) : f˜ = f (·|bi , b−i ) for some bi ∈ Bi .
In the multi-agent case, multiple actions could lead to the
′
same state distribution, i.e.,
) there could exist bi ̸= bi such that
f (·|bi , b−i ) = f ·|b′i , b−i . In such a case, the agent wants to
(
choose an action with the smallest cost, and therefore, agent i’s
indirect cost function Ci (·; b−i ) : Fi (b−i ) → R+ is given by
( )
Ci f˜ ; b−i = min ci (bi ) subject to f (bi , b−i ) = f˜ .
bi ∈Bi
Replacing F and c with Fi (b−i ) and Ci (·|b−i ), we can apply the
argument of the single-agent case to multiple-agent cases. That
is, when Ci (·|b−i ) is totally differentiable, we can characterize
inducibility by using the first-order condition argument.
The exact characterization we provide from the next sub-
section is weaker than the naïve extension of the single-agent
H. Matsushima and S. Noda
Fig. 2. Deviation path. If zi is not perpendicular to t(βi ), agent i has an incentive to make a unilateral deviation along with βi (i.e., increase or decrease α slightly).
(For interpretation of the references to color in this figure legend, the reader is referred to the web version of this article.)
case discussed above. Since our characterization exploits the first-
order condition argument, the differentiability of the cost func-
tion is essential. However, even when the original cost function
ci is differentiable, the indirect cost function Ci (·; b−i ) may not,
because of the minimum operator. From the next subsection, we
discuss that the differentiability of Ci (·; b−i ) is not necessary for
applying the first-order condition argument to the multi-agent
case. Instead, we provide a way to characterize the desirable
payment rules using agents’ local deviations.
4.3. Deviation path
We first define the deviation path, a class of local deviations
that an agent can take. In the single-agent example, the agent
can take an action such as ‘‘increase f (2) by ϵ and decrease f (3)
by ϵ ’’. This is a ‘‘class of actions’’ in the sense that the agent can
specify how much to shift by selecting the value of ϵ . Likewise, a
deviation path defines a pattern of actions that an agent can take.
Definition 2 (Deviation Path). A mapping βi : [−1, 1] → Bi is said
to be a deviation path of (i, b) ∈ N × B if
βi (0) = bi ,
βi (α) = βi α ′ ⇒ α = α ′ ,
[ ( )] [ ]
ci (βi (α)) is differentiable in α at α = 0,
and there exists a tangent of βi at b, which is denoted by t(βi ) ∈
R|Ω | , where
f (·|βi (α) , b−i ) − f (·|b)
t (βi ) ≡ lim .
α→0 α
Mathematically, a deviation path is an ordered subset of the
action space. An agent can always make a local unilateral devia-
tion ‘‘along with’’ the deviation path; i.e., to take βi (α) ∈ Bi with
α ̸= 0, which leads to a smooth shift of the state distribution.
Fig. 2a illustrates an example of deviation path βi . We assume
|Ω | = 3, and the triangle represents the probability simplex
∆ (Ω ) = ∆2 . The blue point represents f (·|b). Each point on the
orange curve corresponds to a probability distribution that can be
generated by agent i’s unilateral deviation along deviation path
βi . The tangent of βi at b, t(βi ), is depicted as the green-dotted
arrow. The tangent specifies the consequence of local deviations
along with the path.
Now, we characterize the dimensionality of the set of mech-
anisms that induce the targeted action profile, Xi (b, g ). Fix an
arbitrary payment rule for agent i, xi ∈ Xi (b, g). We define
Zi (b, g , xi ) ≡ zi ∈ R|Ω | : xi + zi ∈ Xi (b, g) .
{ }
Recall that we defined dimension of general sets as the dimension
of the minimal vector space that contains the set. Accordingly, for
5
Journal of Mathematical Economics 106 (2023) 102831
every set A and vector a, dim A = dim (A + a) holds. Therefore,
we have
dim Xi (b, g ) = dim Zi (b, g , xi ) .
Proposition 1 shows that each deviation path constrains Zi
(b, g , xi ) (and Xi (b, g )) by imposing one equality constraint.
Proposition 1. Suppose that (g , xi ) induces bi given b−i and there
exists a deviation path βi of (i, b) ∈ N × B. Then, we have zi ∈
Zi (b, g , xi ) only if
zi · t(βi ) = 0. (3)
All proofs are shown in Appendix A. Proposition 1 implies that
a payment rule x̃i for agent i is never included in Xi (b, g) if the
payment increment zi ≡ x̃i − xi is not perpendicular to the tangent
of the deviation path βi (i.e., zi · t(βi ) ̸ = 0). Since the mechanism
(g , xi ) induces bi , agent i is (approximately) indifferent for local
deviations along the deviation path βi in (g , xi ). If (g , xi + zi )
induces bi , agent i must also be indifferent for local deviations
along βi in (g , xi + zi ). This implies that the expected value of
zi must be (approximately) unchanged even if agent i locally
deviates. In Fig. 2b, we illustrate the situation in which zi · t (βi ) ̸ =
0, and thus the agent has an incentive to deviate from bi .
In general, there exist multiple deviation paths whose tan-
gents are linearly independent. In such a case, the equality condi-
tion (3) must be satisfied for all deviation paths. Accordingly, one
deviation path decreases the upper bound of the dimensionality
of Xi (b, g) by one as follows:
Theorem 1. Suppose there exist Ki deviation paths of (i(, b),) denoted
K
by( βi1 ,). . . , and βi i , such that the respective tangents t βi1 , . . . , and
t βi
Ki
are linearly independent. Then, we have
dim Xi (b, g ) ≤ |Ω | − Ki . (4)
Theorem 1 exhibits the tradeoff between the dimensionality
of the action space and that of payment rules inducing a targeted
action profile. The variety of desirable payment rules sharply
decreases as the action space becomes larger in the following
sense. Consider a mechanism that successfully induces a targeted
action profile under the current action space. Now, assume that
there arises a new class of actions (deviation path). With the
new (larger) action space, the mechanism induces the targeted
action only when the tangent of the new deviation path, t (βi ),
is perpendicular to the payment increment, zi (Proposition 1).
However, we have no reason to expect that this condition holds,
and therefore, the mechanism ‘‘typically’’ fails to induce the tar-
geted action with the new action space. In this sense, the set
H. Matsushima and S. Noda Journal of Mathematical Economics 106 (2023) 102831

5. Efficiency

This section studies efficient mechanism design (i.e., maxi-

mization of social welfare). We denote the valuation function of
the central planner by v0 : A × Ω → R. An allocation rule g is said
to be allocatively efficient if
∑ ∑
vi (g(ω), ω) ≥ vi (a, ω)
i∈N ∪{0} i∈N ∪{0}

for all a ∈ A and ω ∈ Ω . A combination of an action profile and an

allocation rule (b, g) is said to be fully efficient if g is allocatively
efficient and the selection of b maximizes the total welfare in
Fig. 3. Rich action space. The case of |Ω | = 3. Bi is rich at b if there are two expectation. That is, it satisfies
(= |Ω | − 1) different deviation paths of (i, b). ⎡ ⏐ ⎤
∑ ⏐ ∑
vi (g (ω) , ω)⏐⏐ b⎦ − ci (bi )
⏐
E⎣
of mechanisms to solve the hidden action problem is greatly i∈N ∪{0} ⏐ i∈N
reduced if an agent’s action space is slightly increased. ⎡ ⏐ ⎤
⏐
Since Proposition 1 and Theorem 1 characterize Xi (b, g ) only
∑ ∑ ( )
vi (g (ω) , ω)⏐⏐ b̃⎦ −
⏐
≥E ⎣ ci b̃i
using local deviations (i.e., the first-order condition argument),
i∈N ∪{0} ⏐ i∈N
the inequality (4) may not provide a tight upper bound. To tightly
characterize Xi (b, g ), we need to consider nonlocal deviations, for all b̃ ∈ B. A mechanism (g , x) is fully efficient if there exists an
i.e., the possibility that an agent can jump the state distribution action profile b ∈ B such that (g , x) induces b and (b, g) is fully
by paying a substantial cost (relative to the targeted action). efficient.7
Whether an agent actually has an incentive to take such a nonlo- A payment rule x is said to be VCG if there exists yi : Ω−i → R
cal deviation depends on the fine detail of the agent’s valuation for each i ∈ N such that
function vi and cost function ci , and therefore, a concise and ∑
tractable characterization is hopeless. xi (ω) = − vj (g(ω), ω) + yi (ω−i )
j∈N ∪{0}\{i}

4.4. Richness for all i ∈ N and ω ∈ Ω . A VCG payment rule gives each agent i ∈
N the monetary amount equivalent to the∑other agents’ welfare
From now, we analyze the case in which an agent has a
plus the central planner’s welfare (i.e., j∈N ∪{0}\{i} vj (g(ω ), ω ))

maximal number of deviation paths. Since ∆ (Ω ) is a (|Ω | − 1)-
dimensional space, there are at most |Ω − 1| linearly indepen-
dent tangent vectors. We say that agent i’s action space Bi is rich
at action profile b if there indeed exist |Ω | − 1 deviation paths
whose tangents are linearly independent (see Fig. 3).
Definition 3. Agent i’s action space Bi is rich at action profile b
if there exist |Ω | − 1 deviation paths of (i, b) whose tangents are
linearly independent. An action space B is rich at b if Bi is rich at
b for all i ∈ N.
When Bi is rich at b, Theorem 1 implies that dim Xi (b, g) = 1.
Accordingly, whenever xi and x̃i induce bi given b−i , then xi and
x̃i are the same up to constants. Hence, we have proved the
following equivalence result:
Corollary 1. Suppose that Bi is rich at b and (g , xi ) induces bi given
b−i . Then, the following are equivalent:
(i) xi ∈ Xi (b, g) and x̃i ∈ Xi (b, g).
(ii) x̃i = xi + z i for some z i ∈ R.
To interpret Corollary 1, let us suppose that bi is a maximizer
of an objective function ui given that other agents take b−i , that
is,
[ ]
bi ∈ max E ui (ω) |b̃i , b−i − ci (bi ) .
b̃i ∈Bi
Clearly, the payment rule xi (ω) = ui (ω) − vi (g (ω) , ω)
can induce bi given b−i . Corollary 1 implies that, when agents
have ‘‘many’’ actions and can shift the state distribution to any
direction, the payment rule specified above is indeed the only
way (up to constant) to induce the focused action, bi .
and retrieves the monetary payment yi (ω−i ) that is independent
of ωi .
We now introduce a subclass of VCG mechanisms, namely, the
class of pure-VCG mechanisms. A payment rule x is said to be
pure-VCG if it is VCG and yi (·) is constant for each i ∈ N; there
exists a vector ȳ = (ȳi )i∈N ∈ Rn such that
∑
x i (ω ) = − vj (g(ω), ω) + ȳi
j∈N ∪{0}\{i}
for all i ∈ N and ω ∈ Ω . Pure-VCG payment rules are special
cases of VCG payment rules, where the central planner imposes
on each agent i a fixed amount ȳi as a non-incentive term. We
term a combination of efficient allocation rule and a VCG pay-
ment rule (pure-VCG payment rule) a VCG mechanism (pure-VCG
mechanism).
The pure-VCG mechanism can be interpreted as a general-
ization of the selling-out contract of the principal–agent prob-
lems. The selling-out contract perfectly aligns the output and
the agent’s payoff (by selling out the firm from the principal to
the agent). Under the selling-out contract, the agent’s problem
becomes isomorphic to the maximization of the expected profit;
thus, the first-best effort level is induced (Harris and Raviv, 1979).
In an efficient mechanism design problem, the ‘‘output’’ is
social welfare, and the pure-VCG mechanism perfectly aligns each
agent’s payoff with the social welfare. Accordingly, pure-VCG
induces efficient actions. We further show that, when the action
space is rich, only pure-VCG mechanism can be fully efficient: all
the other mechanisms are exploited by some actions.
7 Our definition of full efficiency of mechanisms is different from the
efficiency defined in Hatfield et al. (2014) in that we fix agents’ action spaces
and cost functions.

6
H. Matsushima and S. Noda Journal of Mathematical Economics 106 (2023) 102831

Theorem 2. Proof. zi , defined by (5), is the difference between a pure-

VCG payment rule and the pivot payment rule. Since pure-VCG
(i) Pure-VCG mechanisms are fully efficient.
mechanisms induce b, it follows from Proposition 1 that the pivot
(ii) Suppose that, for every fully efficient (b, g), B is rich at b. Then,
mechanism induces bi given b−i only if zi · t(βi ) = 0. □
a mechanism is fully efficient if and only if it is pure-VCG.
Proposition 2 indicates that the pivot mechanism induces an
When the action space is rich, even if such information is avail-
efficient action profile only when a special congruence condition,
able, the pure-VCG mechanism is the only choice for maximizing
i.e., the negation of (6), is satisfied. Therefore, even if there exists
the social welfare.
at least one deviation path around the efficient action profile, the
We say that we have private values if, for every i ∈ N, (i)
pivot mechanism typically fails to achieve full efficiency in the
the valuation vi (a, ω) is independent of the other agents’ type
sense that there is no reason to expect the negation of (6).11
profile ω−0−i ≡ (ωj )j∈N \{i} ∈ Ω−0−i ≡ ×j∈N \{i} Ωj , and (ii) v0 (a, ω)
is independent of ω−0 . We write vi (a, ω0 , ωi ) instead of vi (a, ω)
Remark 1. In Appendix B, we propose an open-bidding proce-
for each i ∈ N, and v0 (a, ω0 ) instead of v0 (a, ω).8 It is well-
dure that implements pure-VCG mechanisms. In our procedure,
known that, when we have private values, a truthful reporting
the mechanism determines the compensation for losers, rather
is a dominant strategy for every agent under a VCG mechanism.
than the payment to the winner (as in standard auctions). The
Thus, the pure-VCG mechanism not only solves the hidden-action
mechanism starts with a sufficiently high price and gradually
problem but also the hidden-information problem.
descends the price until one bidder declares to win the object.
By contrast, Theorem 2 also implies that achieving full effi-
The winner obtains nothing, and the losers are compensated with
ciency by an incentive compatible mechanism is impossible when
the price determined by the mechanism. This procedure contrasts
we have interdependent values (i.e., the private-value assump-
with the ascending auction implementing the pivot mechanism.
tion is violated). While VCG incentivizes truthful reporting only
with private values, even with interdependent values, allocative
Remark 2. Although the pure-VCG mechanism achieves full
efficiency is sometimes achievable by using some mechanisms
efficiency, it cannot earn non-negative revenue in a very general
other than VCG.9 Nevertheless, Theorem 2 indicates that the
class of environment. In Appendix C, we analyze the revenue
pure-VCG mechanism is the only choice for inducing an effi-
collected by the pure-VCG mechanism.
cient action profile. Hence, with interdependent values, (i) an
efficient action profile, (ii) an efficient allocation rule, and (iii)
6. Independent types and interim equivalence
incentive compatibility for reporting cannot be achieved at the
same time, in general.10 This generalizes the observation for the
Thus far, we have assumed that each agent’s action choice
mechanism design problem with information acquisition, studied
(possibly) has externality effects (i.e., may influence the distri-
by Bergemann and Välimäki (2002).
bution of the entire state ω, rather than his private type ωi ). We
Although any VCG mechanism is incentive compatible and
have seen that, even if the dimensionality of unilateral deviations
allocatively efficient in the private-value case, they do not always
is low, the pivot mechanism fails to achieve full efficiency un-
induce an efficient action profile. For example, consider the pivot
less a special congruence condition is satisfied (Proposition 2).
mechanism (g , x), which is a VCG mechanism specified by
∑ If agents can take various unilateral deviations (i.e., if the action
yi (ω−i ) = min vj g ωi′ , ω−i , ω0 , ωj . space is rich), only the pure-VCG mechanism can be full efficient
( ( ) )
ω′ ∈Ω
i i (Theorem 2).
j∈N ∪{0}
This section excludes externality effects by assuming that one
The pivot mechanism’s ‘‘non-incentive term’’ yi is defined for agent’s action only influences his own type distribution. Even
making agent i’s ex-post payoff equal to zero when agent i has the with such an assumption, Theorem 1 holds without any mod-
worst type. Clearly, the pivot mechanism is not pure-VCG because ifications. However, the assumption reduces the set of possible
yi is not a constant. The following proposition demonstrates a deviation paths; thus, the set of mechanisms inducing a targeted
sufficient condition under which the pivot mechanism fails to action profile becomes substantially larger.
achieve full efficiency: As in Bergemann and Välimäki (2002) and Hatfield et al.
(2014), this section assumes independent types of information
Proposition 2. Suppose that allocation rule g is allocatively effi- structure. We have independent types if each agent i’s action
cient. Define zi : Ω → R by choice bi ∈ Bi influences only the marginal distribution of the
agent’s own type ωi ; for every ω ∈ Ω and b ∈ B, the (joint) type
∑
zi (ω) = min vi g ωi′ , ω−i , ω0 , ωj .
( ( ) )
(5)
ω′ ∈Ω
i i distribution f can be written as follows.
j∈N ∪{0}
∏
Then, a pivot mechanism fails to achieve full efficiency if, for every f (ω|b) = f0 (ω0 ) fi (ωi |bi ) .
b ∈ B such that (b, g) is fully efficient, there exists an agent i ∈ N i∈N
and a deviation path βi of (i, b) such that Here, fi (·|bi ) denotes the marginal distribution of each agent i’s
type ωi , which is assumed to depend only on bi , and f0 (·) denotes
zi · t(βi ) ̸ = 0. (6)
the distribution of the public signal ω0 , which is assumed to
be independent of the action profile, b ∈ B. When we have
8 We permit the valuations to depend on the public signal ω . We write
0
independent types, agent i’s action space is equivalent to the
v0 (a, ω0 , ω0 ) instead of v0 (a, ω0 ).
9 See, for example, Crémer and McLean (1985, 1988), Maskin (1992), Das- set of available marginal distributions on agent i’s type. With
gupta and Maskin (2000), Jehiel and Moldovanu (2001), and Bergemann and independent types, for every ξ : Ω → R and ξi : Ωi → R, we
Välimäki (2002). can simply write Eω−i [ξ (ω̃i , ω−i )|b−i ] and E [ξi (ωi )|bi ] instead of
10 Mezzetti (2004) shows that, if the realized valuation v (g(ω), ω) is observ-
i Eω−i [ξ (ω̃i , ω−i )|b, ωi ] and E [ξi (ωi )|b], respectively.
able as an ex-post public signal and is contractible, even with interdependent
values, (allocatively) efficient mechanisms can be implemented providing any
VCG expected payoffs to each agent (see Noda, 2019 for more general ex-post 11 Krähmer and Strausz (2007) showed that the pivot mechanism generi-
signals). If these schemes are available, full efficiency is achievable even with cally fails to induce an efficient investment for the case of one-dimensional
interdependent values. investments. Proposition 2 generalizes this observation.

7
H. Matsushima and S. Noda
With independent types, the action set cannot be rich (i.e.,
cannot have |Ω | − 1 distinct deviation paths). With independent
types, the choice of bi is isomorphic to the choice of fi ∈ ∆(Ωi ),
where dim ∆(Ωi ) = |Ωi |. Accordingly, there are at most |Ωi | − 1
deviation paths whose tangents are linearly independent. We say
that the action space Bi is individually rich at bi if such deviation
paths exist.
Definition 4 (Individual Richness). Agent i’s action space Bi is
individually rich at bi if there exist |Ωi | − 1 deviation paths of
(i, b) whose tangents are linearly independent.
Parallel to Corollary 1, when the action space is individually
rich, the payment rule inducing a targeted action profile becomes
unique up to ‘‘constants’’ in the interim sense.
Corollary 2. Suppose that Bi is individually rich at b and (g , xi )
induces bi given b−i . Then, the following are equivalent:
(i) xi ∈ Xi (b, g) and x̃i ∈ Xi (b, g).
(ii) x̃i = xi + ri for some ri : Ω → R such that Eω−i [ri (ωi , ω−i )|b−i ]
is independent of ωi ∈ Ωi .
The distribution of ω−i is determined solely by the choice of
b−i , which agent i cannot manipulate. Accordingly, agent i’s uni-
lateral deviation does not change the value of Eω−i [ri (ωi , ω−i )|b−i ]
whenever it is independent of ωi . Hence, Condition (ii) implies (i).
When the action space is individually rich, agent i can manipulate
the distribution of ωi in full-dimensional directions. Hence, if
Eω−i [ri (ωi , ω−i )|b−i ] depends on ωi , agent i has a way to take
advantage of it. Accordingly, Condition (i) implies (ii).
Now, we consider fully efficient mechanisms. A payment rule
x is said to be expectation-VCG if, for each i ∈ N, there exist
ri : Ω → R such that for every i ∈ N and ω ∈ Ω , we have
∑
xi (ω) = − vj (g (ω) , ω) + ri (ω) ,
j∈N ∪{0}\{i}
and Eω−i [ri (ωi , ω−i )|b−i ] is independent of ωi ∈ Ωi . We term the
combination of an efficient allocation rule and expectation-VCG
payment rule an expectation-VCG mechanism. Clearly, any VCG
mechanism (including pure-VCG) belongs to expectation-VCG.
It is straightforward to show that any expectation-VCG mech-
anism can induce an efficient action profile (Rogerson, 1992).
Furthermore, by Corollary 2, any mechanism inducing the effi-
cient action profile is interim equivalent if the action space is
individually rich. Accordingly, only expectation-VCG can be fully
efficient.
Theorem 3. Under the assumption of independent types:
(i) Any expectation-VCG mechanism is fully efficient.
(ii) Suppose that, for every fully efficient (b, g), b is individually
rich. Then, a mechanism is fully efficient if and only if it is
expectation-VCG.
The statement (i) was proved by Rogerson (1992) and known
in the literature. We prove the converse: The statement (ii) of
Theorem 3 provides a condition under which the expectation-
VCG is the only class of fully efficient mechanisms. Bergemann
and Välimäki (2002) studied information acquisition for each
agent’s own hidden state with independent types and private
values and demonstrated that VCG mechanisms achieve full effi-
ciency. We derive the full characterization while allowing general
action spaces. Hatfield et al. (2014) showed that when detailed
information about the environment (action space, cost function,
and state distribution associated with each action profile) is not
8
Journal of Mathematical Economics 106 (2023) 102831
available, the central planner’s only option to achieve full effi-
ciency is to use a VCG mechanism.12 This result is a special case
of our Theorem 3 in the sense that the class of VCG mecha-
nisms can be characterized as the class of ‘‘detail-free’’ (i.e., it
can be constructed without using information about (f , B, c ))
expectation-VCG mechanisms.
Finally, we discuss the incentives for truthful reporting. When
the type distribution is fixed and we have private values, the
expectation-VCG mechanism is Bayesian incentive compatible
(BIC): if a profile of truthful reporting consists a Bayesian Nash
equilibrium. However, in our model, standard BIC is not sufficient
for preventing deviations. The traditional definition of BIC only
considers deviations in reporting (assuming a type distribution
to be fixed). By contrast, in our model, agents can make a joint
deviation in actions and reporting. Accordingly, both targeted
action and allocation are achieved in equilibrium only if the
following condition is satisfied.
Definition 5 (Bayesian Inducibility and Incentive Compatibility). A
combination of an action profile and a mechanism (b, (g , x)) is
Bayesian inducible and incentive compatible (BIIC) if the selection
of action profile b at Stage 2 and the truthful revelation at Stage
4 result in a perfect Bayesian equilibrium; for every agent i ∈ N,
action b′i ∈ Bi , and reporting strategy σi : Ωi → Ωi ,
E [vi (g (ω) , ω) − xi (ω) |b] − ci (bi )
≥ E vi (g (σi (ωi ) , ω−i ) , ω−i ) − xi (σi (ωi ) , ω−i ) |b′i , b−i
[ ]
− ci b′i .
( )
The expectation-VCG mechanism indeed satisfies this condi-
tion.
Proposition 3. Suppose that we have private values and indepen-
dent types. Then, any expectation-VCG mechanism satisfies BIIC
For example, the AGV mechanism, established by Arrow (1979)
and D’Aspremont and Gerard-Varet (1979), is an expectation-VCG
mechanism. Furthermore, by construction, ∑ the AGV mechanism
satisfies budget balance: for all ω ∈ Ω , i∈N xi (ω ) = 0. Accord-
ingly, with independent types, the central planner can achieve
full efficiency along with BIIC and budget balance.
7. Conclusion
We have studied a mechanism design problem in which agents
take hidden actions that determine the state distribution. The
diversity of possible actions greatly limits the mechanisms that
can effectively induce a desired action profile. When agents are
able to make various unilateral deviations, i.e., when the action
space is rich at the targeted action profile, the mechanism that
successfully induces the desired action profile becomes unique
up to constants.
We then apply our characterization results to efficient mech-
anism design and establish that the pure-VCG mechanism is the
only fully efficient mechanism if the action space is rich. The
pure-VCG mechanism, however, has a highly constrained form
that cannot satisfy certain desirable properties, such as budget
balance. As a result, this finding may be interpreted as a negative
outcome.
To address this impossibility result, it is crucial for the central
planner to have a comprehensive understanding of the set of
possible action choices. If the planner lacks this knowledge, she
12 On the other hand, Tomoeda (2019) pointed out that VCG mechanisms fail
to induce an efficient action profile as a unique equilibrium even under the
absence of externality effects.
H. Matsushima and S. Noda Journal of Mathematical Economics 106 (2023) 102831

for all k = 1, 2, . . . , Ki .
}
must opt for a robust and detail-free mechanism like the pure-
VCG, which achieves full efficiency regardless of the specifics K
Since t βi1 , . . . , and t(βi i ) are linearly independent,
( )
of the action and state distributions. On the other hand, if the
planner has detailed knowledge of the action set, she can design
dim zi ∈ R|Ω | : zi · t βik = 0 for all k = 1, 2, . . . , Ki ≤ |Ω | − Ki .
{ ( ) }
a mechanism that is tailored to the specific problem at hand.
However, such a mechanism requires detailed information about Therefore,
the set of actions, state distributions corresponding to each action
profile, and agents’ perceptions. dim Zi (b, g , xi ) ≤ |Ω | − Ki .
An alternative option for the central planner is to choose
Hence, we have dim Xi (b, g) = dim Zi (b, g , xi ) ≤ |Ω | − Ki as
to sacrifice full efficiency in order to gain more flexibility in
desired. □
mechanism design. One approach is to use the pivot mechanism
to achieve allocation efficiency and non-negative revenue, while
Proof of Theorem 2. If (b, g) is fully efficient and x is pure-VCG,
compromising on action efficiency. Alternatively, the planner can
then, for every i ∈ N and for any action b′i ∈ Bi ,
use rewards or punishments to deter action deviations, while
sacrificing allocation efficiency. It would be intriguing to examine E [vi (g (ω) , ω) − xi (ω) |b] − ci (bi )
the optimal trade-off between the two types of efficiency.
− E vi (g (ω) , ω) − xi (ω) |b′i , b−i + ci b′i
[ ] ( )
An intriguing potential application of our theory is in the realm ⎡ ⏐ ⎤
of mechanism design for addressing environmental problems, ∑ ⏐
vj (g (ω) , ω)⏐⏐ b⎦ − ci (bi )
⏐
which has gained increasing attention in recent years. Economic =E ⎣
activities related to environmental issues are varied and fre- j∈N ∪{0} ⏐
quently involve externalities, while the methods for monitoring, ⎡ ⏐
⏐
⎤
evaluating, and incentivizing these activities are also quite di- ∑
vj (g (ω) , ω)⏐⏐ bi , b−i ⎦ + ci b′i
⏐ ′ ( )
verse. To encourage favorable behaviors, the central planner must −⎣
carefully decide which activities to monitor, assess, and reward. j∈N ∪{0} ⏐
This paper highlights the need for caution when choosing in- ≥ 0,
centives that encourage unmonitored activities with externalities.
Detailed designs should be explored in future studies that focus which implies that (g , x) induces b. Furthermore, if B is rich at
on specific issues. b, it is clear from Corollary 1 and the definition of the pure-VCG
payment rule that only pure-VCG mechanisms will induce b. □
Declaration of competing interest
Proof of Corollary 2. (i) ⇒ (ii) is straightforward from the fact
The authors declare that they have no known competing finan- that Eω−i [ri (ωi , ω−i )|b−i ] is independent of ωi and bi .
cial interests or personal relationships that could have appeared To show the other direction, we first prove the following
to influence the work reported in this paper. lemma.

Data availability Lemma 1. With the assumption of independent types, if βi is a

deviation path of b and t(βi ) ∈ R|Ω | is its tangent, then there exists
No data was used for the research described in the article. ti (βi ) ∈ R|Ωi | such that
fi (·|βi (α )) − fi (·|bi )
Appendix A. Omitted proofs lim ≡ ti (βi ) .
α→0 α
Furthermore, for all deviation paths βi1 , . . . , βiK , their respec-
Proof of Proposition 1. Consider an arbitrary zi ∈ Zi (b, g , xi ).
tive tangents t(βi1 ), . . . , t(βiK ) are linearly independent if and only
Since (g , xi ) induces bi given b−i , the following first-order con-
dition is necessary for preventing agent i from locally deviating if ti (βi1 ), . . . , ti (βiK ) are linearly independent.
along βi :
⏐ Proof. By independent types,
d
{E [vi (g(ω), ω) − xi (ω)|βi (α ), b−i ] − ci (βi (α ))}⏐⏐ = 0. (A.1)
⏐
dα f (ω|βi (α) , b−i ) − f (ω|bi , b−i )
α=0 ∏ (
fj ωj |bj · (fi (ωi |βi (α)) − fi (ωi |bi )) .
)
Similarly, (g , xi + zi ) must satisfy the following first-order =
condition: j̸ =i
⏐
d Accordingly, we have
{E [vi (g(ω), ω) − xi (ω) − zi (ω)|βi (α ), b−i ] − ci (βi (α ))}⏐⏐ = 0.
⏐
dα α=0
∏ ( fi (ωi |βi (α)) − fi (ωi |bi )
t (ω, βi ) = fj ωj |bj · lim
)
(A.2) α→0 α
j ̸ =i
Subtracting (A.2) from (A.1), we obtain ∏ (
fj ωj |bj · ti (ωi , βi ) .
)
⏐ = (A.3)
d
E [zi (ω)|βi (α ), b−i ]⏐⏐ = 0,
⏐
j ̸ =i
dα α=0 This indicates that whenever t(βi ) exists, ti (βi ) also exists; thus,
or equivalently, zi · t(βi ) = 0. □ ti (βi ) is well-defined.
Suppose that t(βi1 ), . . . , t(βiK ) are not linearly independent;
Proof of Theorem 1. Proposition 1 implies then, there exists (λk )Kk=0 such that λk ̸ = 0 for some k ∈ 1, . . . , K ,
and
Zi (b, g , xi ) ⊂ zi ∈ R|Ω | : zi · t βik = 0 for all k = 1, 2, . . . , Ki .
{ ( ) }
K
Hence,
∑
λk · t(ω, βik ) = 0
|Ω |
dim Zi (b, g , xi ) ≤ dim zi ∈ R : zi · t βik = 0
{ ( )
k=1

9
H. Matsushima and S. Noda Journal of Mathematical Economics 106 (2023) 102831

for all ω ∈ Ω . Fix some ω−i ∈ Ω−i arbitrarily. It follows from An efficient allocation rule g is given by
(A.3) that
g (ω) ∈ argmax ωi for all ω ∈ Ω .
K K i∈N
∑ 1 ∑
λk · ti (ωi , βik ) = ∏ λk · t(ω, βik ) = 0 The pure-VCG payment rule is given by
j ̸ =i f j (ωj |bj )
k=1 k=1
if g (ω) = i,
{
ȳi
for all ωi ∈ Ωi . Hence, ti (βi1 ), . . . , ti (βiK ) are not linearly indepen- xi (ω) =
−ωg(ω) + ȳi otherwise,
dent either. If ti (βi1 ), . . . , ti (βiK ) are not linearly independent, we
can show that t(βi1 ), . . . , t(βiK ) are not independent in a similar where ȳi ∈ R is an arbitrary real number for each i ∈ N.
manner. □ We consider the following open-bid descending procedure:

Proof of Corollary 2 (continued). Suppose that both (g , x) and 1. Each agent pays a fixed participation fee ȳi to the central
(g , x̃) induces b. Then, for all i ∈ N, the following first-order planner at the beginning.
condition of necessary condition must be satisfied: for k = 2. The mechanism initially sets the price sufficiently high, and
1, . . . , |Ωi | − 1, then gradually descends the price.
3. When an agent declares taking the object, this descending
∂ { [
⏐
E vi (g(ω), ω) − xi (ω)|βi (α ), b−i − ci βi (α) ⏐⏐ = 0,
k
] ( k )}⏐
procedure is immediately terminated. The agent who de-
∂α α=0 clares taking the object becomes the winner and obtains
and this object.
∂ { [ 4. The central planner does not require the winner to pay
⏐
E vi (g(ω), ω) − x̃i (ω)|βi (α ), b−i − ci βi (α) ⏐⏐ = 0.
k
] ( k )}⏐
any additional fee. Instead, the central planner gives any
∂α α=0
other agent (i.e., any loser) the price at the ending time as
Comparing these equations, we obtain a compensation.
∂ [
⏐
E xi (ω) − x̃i (ω)|βi (α ), b−i ⏐⏐ It is a weakly dominant strategy13 for each agent to ‘‘declare
k
]⏐
=0 (A.4)
∂α α=0 taking the object’’ exactly when the current price is equal to the
for k = 1, . . . , |Ωi | − 1. With independent types, (A.4) can be agents’ value. If all the agents adopt this dominant strategy, then
rewritten as (i) the agent with the highest value wins, (ii) the winner’s pay-
∂ ment is ȳi , and (iii) the loser’s payment is −ωg(ω) + ȳi . Accordingly,
⏐
Eω Eω−i [xi (ωi , ω−i ) − x̃i (ωi , ω−i )|b−i ]|βi (α ) ⏐⏐
[ k
]⏐
=0 (A.5) this open-bid descending procedure generates the same outcome
∂α i α=0 as a pure-VCG mechanism.
for k = 1, . . . , |Ωi | − 1. Define The pivot mechanism (the second-price auction) is imple-
mented by the popular ascending auction that determines the
wi (ωi ) ≡ Eω−i xi (ωi , ω−i ) − x̃i (ωi , ω−i ) |b−i .
[ ]
winner’s payment. By contrast, our procedure descends the price
Then, (A.5) is equivalent to and determines the compensation for losers, implementing a
pure-VCG mechanism.
wi · ti (βik ) = 0 (A.6)
|Ωi |−1
for k = 1, . . . , |Ωi | − 1, where ti (βi1 ), . . . , ti (βi ) are obtained Appendix C. Individual rationality and revenues
k |Ωi |−1
by Lemma 1. Since ti (β
{ }
i ) k=1 are linearly independent,
Assuming private values, this section studies whether the
dim wi ∈ R|Ωi | : wi · ti (βik ) = 0 for k = 1, . . . , |Ωi | − 1 = 1.
{ }
central planner can achieve efficiency without deficits. We define
This and (A.6) imply that there exists z i ∈ R such that the central planner’s ex-post revenue by14
∑
wi (ωi ) = Eω−i [xi (ωi , ω−i ) − x̃i (ωi , ω−i )|b−i ] = z i v0 (g(ω), ω0 ) + xi (ω) , (C.1)
i∈N
for all ωi ∈ Ωi . Since ri (ω) = xi (ω) − x̃i (ω), Corollary 2 is
proved. □ and the expected revenue in the ex-ante term by
[ ⏐ ]
⏐
Proof of Theorem 3. Whenever (b, g) is fully efficient and x is
∑
E v0 (g (ω) , ω0 ) + xi (ω)⏐ b .
⏐
pure-VCG, then (g , x) induces b. Furthermore, if x is a pure-VCG i∈N
⏐
payment rule, x̃ satisfies x̃i (ω) = xi (ω)+ri (ω) and Eω−i [ri (ωi , ω−i )|
We introduce three notions of individual rationality below.
b−i ] is independent of ωi ∈ Ωi , then x̃ is an expectation-VCG
The timings of the exit opportunities are depicted in Fig. 1.
payment rule. Accordingly, by Corollary 2, (g , x̃) induces b if and
only if x̃ is an expectation-VCG payment rule. □
Definition C1 (Ex-ante Individual Rationality). A combination of
Appendix B. Open-bid implementation of pure-VCG an action profile and a mechanism (b, (g , x)) satisfies ex-ante
individual rationality (hereinafter EAIR) if for all i ∈ N, we have
In a single-unit auction with private values, we can implement E [vi (g(ω), ω0 , ωi ) − xi (ω)|b] − ci (bi ) ≥ 0
a pure-VCG mechanism with an open-bid procedure, just as we
can implement a pivot mechanism with an ascending auction. The
13 This open-bid descending procedure satisfies obvious strategy-proofness as
allocation a ∈ A ≡ 1, 2, . . . , n specifies the agent who is the
winner (who obtains the object). Each agent’s type ωi ∈ Ωi ⊂ R+ defined in Li (2017), same as the ascending auctions.
14 Note that the central planner’s revenue includes not only payments from
specifies the payoff of that agent when she obtains the object, i.e.,
the agents but also the valuation of the central planner. In the single agent
ωi if a = i,
{
case, where the allocation space is degenerate, the value of (C1) corresponds to
vi (a, ωi ) = the principal’s payoff in a standard principal–agent model with a risk-neutral
0 otherwise.
principal and agent.

10
H. Matsushima and S. Noda Journal of Mathematical Economics 106 (2023) 102831
⎡ ⏐ ⎤⎫
Definition C2 (Interim Individual Rationality). A combination of
⏐
∑ )⏐ ⎬
vj g (ω) , ω0 , ωj ⏐⏐ b⎦ ,
(
an action profile and a mechanism (b, (g , x)) satisfies interim −E ⎣ (C.5)
individual rationality (IIR) if j∈N ∪{0}\{i} ⏐ ⎭

Eω−i [vi (g(ωi , ω−i ), ω0 , ωi ) − xi (ωi , ω−i )|b, ωi ] ≥ 0 respectively.

for all i ∈ N and ωi ∈ Ωi , where Proof. By Theorem 2, we can focus on pure-VCG payment rules,
∑ where the constraint for EPIR is equivalent to
Eω−i [ξ (ω̃i , ω−i )|b, ωi ] ≡ ξ (ω̃i , ω−i )f−i (ω−i |b, ωi ) ∑
vj g (ω) , ω0 , ωj ≥ zi for all i ∈ N .
( )
ω−i ∈Ω−i min (C.6)
ω∈Ω
j∈N ∪{0}
denotes the expectation of a function ξ (ω̃i , ·) : Ω−i → R condi-
tional on (b, ωi ). We can maximize the expected revenue by letting zi satisfy
(C.6) with equality for each i ∈ N. Accordingly, the central planner
Definition C3 (Ex-post Individual Rationality). A mechanism (g , x) can receive from each agent i the expected value given by
satisfies the ex-post individual rationality (EPIR) if for all i ∈ N and
∑
vj g (ω) , ω0 , ωj
( )
min
ω ∈ Ω , we have ω∈Ω
j∈N ∪{0}

Eω−i [vi (g(ωi , ω−i ), ω0 , ωi ) − xi (ωi , ω−i )|b, ωi ] ≥ 0.

⎡ ⏐ ⎤
∑ ⏐
vj g (ω) , ω0 , ωj ⏐⏐ b⎦ ,
( )⏐
EPIR implies IIR; however, IIR does not necessarily imply EAIR −E⎣
j∈N ∪{0}\{i}
because the cost for the action choice at Stage 2 is sunk. The
⏐
following proposition shows that EPIR implies EAIR: which implies (C.2), where we add E [v0 (g(ω), ω0 )|b].
Similarly, the constraint for IIR is equivalent to
Proposition C1. Suppose that (g , x) induces b. Whenever (g , x) ⎡ ⏐ ⎤
satisfies EPIR, (b, (g , x)) satisfies EAIR. ∑ ⏐
vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ ωi , b⎦ ≥ zi
( )⏐
min Eω−i ⎣ (C.7)
ωi ∈Ωi
Proof. Because ci (b0i ) = 0, it follows from EPIR and inducibility j∈N ∪{0} ⏐
that for all i ∈ N and ωi ∈ Ωi . We can maximize the expected revenue
by letting zi satisfy (C.7) with equality for each i ∈ N. Accordingly,
E [vi (g (ω) , ω0 , ωi ) − xi (ω) |b] − ci (bi )
the central planner can receive from each agent i the expected
≥ E [vi (g(ω), ω0 , ωi ) − xi (ω)|b0i , b−i ] − ci (b0i ) ≥ 0, value given by
⎡ ⏐ ⎤
which implies EAIR. □ ∑ ⏐
vj (g(ωi , ω−i ), ω0 , ωj )⏐⏐ ωi , b⎦
⏐
min Eω−i ⎣
The following proposition calculates the maximal expected ωi ∈Ωi
j∈N ∪{0} ⏐
revenues (i.e., the least upper bounds of the central planner’s ⎡ ⏐ ⎤
expected revenues): ∑ ⏐
vj g (ω) , ω0 , ωj ⏐⏐ b⎦ ,
( )⏐
−E⎣
Proposition C2. Suppose that (b, g) is fully efficient, B is rich at j∈N ∪{0}\{i} ⏐
b, and we have private values. Then, the maximal expected revenue which implies (C.3), where we add E [v0 (g(ω), ω0 )|b].
from (b, (g , x)) in terms of x ∈ ×i∈N Xi (b, g) that satisfies EPIR, IIR, The constraint for EAIR is equivalent to
EAIR, and IIR and EAIR are given by ⎡ ⏐ ⎤
∑ ⏐
vj g (ω) , ω0 , ωj
∑
REPIR ≡ n · min vj (g(ω), ω0 , ωj )⏐⏐ b⎦ − ci (bi ) ≥ zi
( ) ⏐
E⎣ (C.8)
ω∈Ω
j∈N ∪{0} j∈N ∪{0} ⏐
⎡ ⏐ ⎤
for all i ∈ N. We can maximize the expected revenue by letting zi
∑ ⏐
− (n − 1) E ⎣ vj g (ω) , ω0 , ωj ⏐⏐ b⎦ ,
( )⏐
(C.2) satisfy (C.8) with equality for each i ∈ N. Accordingly, the central
j∈N ∪{0} ⏐ planner can receive from each agent i the expected value given
⎡ ⏐
⏐
⎤ by
∑ ∑
vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ b, ωi ⎦
)⏐ ⏐ ⎤
RIIR
( ⎡
≡ min Eω−i ⎣ ⏐
ωi ∈Ωi
∑
vj g (ω) , ω0 , ωj ⏐⏐ b⎦ − ci (bi )
( )⏐
i∈N j∈N ∪{0} ⏐ E⎣
⎡ ⏐ ⎤
⏐ j∈N ∪{0} ⏐
∑ (
− (n − 1) E ⎣ g (ω) , ω0 , ωj ⏐⏐ b⎦ ,
)⏐ ⎡ ⏐ ⎤
(C.3) ∑ ⏐
vj g (ω) , ω0 , ωj ⏐⏐ b⎦
( )⏐
j∈N ∪{0} ⏐ −E ⎣
⎡ ⏐ ⎤
⏐ j∈N ∪{0}\{i} ⏐
= E [ vi (g(ω), ω0 , ωi )| b] − ci (bi ) ,
∑ ∑ ( )
vj g (ω) , ω0 , ωj ⏐⏐ b⎦ − cj bj ,
)⏐
REAIR
(
≡E⎣ (C.4)
j∈N ∪{0} j∈N
which implies (C.4), where we add E [v0 (g(ω), ω0 )|b].
⏐
REAIR,IIR ≡ E [ v0 (g (ω) , ω0 )| b] The constraint for IIR and EAIR is equivalent to
⎧ ⎧ ⎡ ⏐ ⎤
∑ ⎨ ⎨ ∑ ⏐
E [ vi (g (ω) , ω0 , ωi )| b] − ci (bi ) , vj g (ω) , ω0 , ωj ⏐⏐ b⎦ − ci (bi ) ,
( )⏐
+ min min E ⎣
⎩ ⎩
i∈N j∈N ∪{0} ⏐
⎡ ⏐ ⎤ ⎡ ⏐ ⎤⎫
∑ ⏐ ⏐ ⎬
∑
vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ b, ωi ⎦ vj (g(ωi , ω−i ), ω0 , ωj )⏐⏐ b, ωi ⎦ ≥ zi .
( )⏐ ⏐
min Eω−i ⎣ min Eω−i ⎣ (C.9)
ωi ∈Ωi ωi ∈Ωi ⎭
j∈N ∪{0} ⏐ j∈N ∪{0} ⏐
11
H. Matsushima and S. Noda Journal of Mathematical Economics 106 (2023) 102831

We can maximize the expected revenue by letting zi satisfy (C.9) We say that we have conditionally independent types if for
with equality for each i ∈ N. Accordingly, the central planner can every b̃ ∈ B, there exists a marginal type distribution of agent
receive from each agent i the expected value given by i, fi (·|bi ) such that for all ω ∈ Ω , we have
⎧ ( ) ∏ ( )
⎨ f ω|b̃ = fi ωi |b̃ ,
min E [ vi (g (ω) , ω0 , ωi )| b] − ci (bi ) ,
⎩ i∈N ∪{0}

⎡ ⏐ ⎤ When we have conditionally independent types, once we fix

an action profile, ωi provides no information for predicting ω−i .
∑ ⏐
vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ b, ωi ⎦
( )⏐
min Eω−i ⎣
ωi ∈Ωi The following proposition states that, when we have condi-
j∈N ∪{0} ⏐
⎡ ⏐ ⎤⎫ tionally independent types, the central planner can earn the same
∑ ⏐ ⎬ expected revenue as in the case of observable actions:
vj (g(ω), ω0 , ωj )⏐⏐ b⎦ ,
⏐
−E ⎣
j∈N ∪{0}\{i} ⏐ ⎭ Proposition C4. Suppose that (b, g) is fully efficient, B is rich at
b, and we have private values and conditionally independent types.
which implies (C.5), where we add E [v0 (g(ω), ω0 )|b]. □
Then, the expected revenue achieved by any VCG mechanism that
satisfies IIR and EAIR is less than or equal to RIIR,EAIR . Furthermore,
EAIR
Clearly, R is equal to the maximized expected social wel-
fare. From the relative strength of the incentive compatibility there exists a pure-VCG mechanism that satisfies IIR and EAIR and
constraints, it is also clear that achieves RIIR,EAIR .
REPIR ≤ RIIR,EAIR ≤ RIIR ,
Proof. We have already shown that there is a pure-VCG mecha-
and nism that achieves RIIR,EAIR . Assuming conditionally independent
RIIR,EAIR ≤ REAIR . types and private values, we consider an arbitrary VCG mecha-
nism (g , x) such that for each i ∈ N, there exists yi : Ω−i → R
Whether RIIR or REAIR is larger depends on the situation. such that
The following proposition indicates that, with the constraints ∑
xi (ω) = − vj g (ω) , ω0 , ωj + yi (ω−i ) for all ω ∈ Ω .
( )
of EPIR, it is difficult for the central planner to achieve full
efficiency without deficits: j∈N ∪{0}\{i}

Proposition C3. Suppose that (b, g) is fully efficient, B is rich at b, EAIR implies

i∈N (bi ) > 0 and

∑
and we have private values. Suppose also that c
⎡ ⏐ ⎤
i ⏐
there exists a null state ω = (ω0 , . . . , ωn ) ∈ Ω in the sense that
∑
E [ yi (ω−i )| b] ≤ E ⎣ vj g (ω) , ω0 , ωj ⏐⏐ b⎦ − ci (bi ) ,
( )⏐
v0 (a, ω0 ) = 0 for all a ∈¯ A, and¯ for every
¯ i ∈ N, vi (a, ω0 , ωi ) = 0
¯ ¯ has j∈N ∪{0}
for all a ∈ A and ω0 ∈ Ω0 . Then, with EPIR, the central planner
⏐
a deficit in expectation: REPIR < 0. while IIR requires
⎡ ⏐ ⎤
Proof. If REAIR < 0, the conclusion would be immediate from ∑ ⏐
E [ yi (ω−i )| b, ωi ] ≤ Eω−i ⎣ vj (g(ωi , ω−i ), ω0 , ωj )⏐⏐ b, ωi ⎦
⏐
the fact that REPIR EAIR
∑ ≤ R . Suppose R
EAIR
≥ 0. Because for
(ω0 , ω1 , . . . , ωn ), i∈N ∪{0} vi (a, ω0 , ωi ) = 0 holds for all a ∈ A,
j∈N ∪{0} ⏐
¯ have
we ¯ ¯ ¯ ¯
∑ for all ωi ∈ Ωi , or, equivalently,
min vi (g(ω), ω0 , ωi ) ≤ 0. ⎡ ⏐ ⎤
ω∈Ω ⏐
i∈N ∪{0}
∑
E [ yi (ω−i )| b] ≤ min Eω−i ⎣ vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ b, ωi ⎦ .
( )⏐
ωi ∈Ωi
It follows from REAIR ≥ 0 and i∈N ci (bi ) > 0 that we have
∑
j∈N ∪{0} ⏐
⎡ ⏐ ⎤
∑ ⏐ ∑ Here, we used the fact that E [ yi (ω−i )| b] = E [ yi (ω−i )| b, ωi ]
vi (g(ω), ω0 , ωi )⏐⏐ b⎦ ≥ ci (bi ) > 0.
⏐
E⎣ because of conditional independence. Accordingly, we have
i∈N ∪{0} ⏐ i∈N
E [ yi (ω−i )| b]
From these observations, ⎧ ⎡ ⏐ ⎤
⏐
∑ ⎨
vj g (ω) , ωj
∑
REPIR = n min vj g (ω) , ω0 , ωj ⏐⏐ b⎦ − ci (bi ) ,
( ) ( )⏐
≤ min E ⎣
ω∈Ω ⎩
j∈N ∪{0} j∈N ∪{0} ⏐
⎡ ⏐ ⎤ ⎡ ⏐ ⎤⎫
∑ ⏐ ⏐ ⎬
− (n − 1) E vj g (ω) , ω0 , ωj ⏐⏐ b⎦
( )⏐ ∑
vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ b, ωi ⎦ ,
( )⏐
⎣ min Eω−i ⎣
ωi ∈Ωi
j∈N ∪{0} ⏐ ⎭
j∈N ∪{0} ⏐
< 0. □
which implies
If REAIR < 0, the conclusion is ∑ immediate from REPIR ≤ REAIR . [ ⏐ ]
Suppose REAIR ≥ 0. It follows from i∈N ci (bi ) > 0 that the second
⏐
xi (ω)⏐ b ≤ RIIR,EAIR . □
∑
E v0 (g(ω), ω0 ) +
⏐
term of REPIR in (C.2) is negative. Due to the presence of the null i∈N
⏐
state, the first term of REPIR in (C.2) is non-positive. Accordingly,
REPIR is negative. One may expect that the central planner will receive a greater
By replacing EPIR with weaker participation constraints, such expected revenue than RIIR,EAIR once we assume that the actions
as IIR and EAIR, and adding some restrictions, it becomes much are fixed or publicly observable. However, Proposition C4 indi-
easier for the central planner to achieve full efficiency without cates that, with conditionally independent types, no VCG mecha-
deficits. nism can achieve the expected revenue greater than RIIR,EAIR . This
12
H. Matsushima and S. Noda Journal of Mathematical Economics 106 (2023) 102831
⎡ ⏐ ⎤
implies that RIIR,EAIR is the upper bound of the expected revenue ∑ ⏐
vj (a, ω0 , ωj )⏐⏐ b⎦ .
⏐
irrespective of the requirement of inducibility.15 = Eω−i ⎣ max
a∈A
Proposition C4 is related to the observation from a classical j∈N ∪{0}\{i} ⏐
principal–agent model. When both the principal and the agent
Therefore, we have
are risk-neutral, one of the revenue-maximizing contracts (which ⎡ ⏐ ⎤
achieves the first best of the principal) is to sell the company to ∑ ⏐
vj (g(ωi , ω−i ), ω0 , ωj )⏐⏐ b⎦
⏐
that agent—that is, to give the entire outcome (externalities to min Eω−i ⎣
ωi ∈Ωi
the principal) in exchange for a fixed constant fee (Harris and j∈N ∪{0} ⏐
Raviv, 1979). By regarding pure-VCG mechanisms as an extension ⎡ ⏐ ⎤
⏐
of such selling-out contracts, Proposition C4 indicates that selling
∑
vj (g(ω), ω0 , ωj )⏐⏐ b⎦ ≥ 0
⏐
−E⎣
the company is the unique revenue-maximizing contract when
j∈N ∪{0}\{i} ⏐
the action space is rich at the efficient action profile and the agent
has unlimited liability (which corresponds to EAIR and IIR). From the assumption of non-negative expected payoffs, we have
It is widely accepted that efficiency is achievable through a
E [ vi (g(ω), ω0 , ωi )| b] − ci (bi ) ≥ 0
VCG mechanism without running expected deficits if inducibility
is not required. With conditionally independent types and some From these observations, for every i ∈ N
moderate restrictions, the non-negativity of RIIR,EAIR is guaranteed ⎧
as follows:
⎨
min E [ vi (g(ω), ω0 , ωi )| b] − ci (bi ) ,
⎩
Proposition C5. Assume the hypotheses of Proposition C2, condi- ⎡ ⏐ ⎤
tionally independent types, and the following conditions: ∑ ⏐
vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ b⎦
( )⏐
Non-Negative Valuation: For every i ∈ N ∪ {0} and ω ∈ Ω , min Eω−i ⎣
ωi ∈Ωi
j∈N ∪{0} ⏐
vi (g(ω), ω0 , ωi ) ≥ 0. ⎡ ⏐ ⎤⎫
⏐
∑ ⏐ ⎬
−E ⎣ vj (g(ω), ω0 , ωj )⏐⏐ b⎦ ≥ 0,
Non-Negative Expected Payoff: For every i ∈ N, ⏐ ⎭
j∈N ∪{0}\{i}
E [vi (g(ω), ω0 , ωj )|b] − ci (bi ) ≥ 0. (C.10)
which, along with non-negative valuations, implies RIIR,EAIR ≥
With IIR and EAIR, the central planner has non-negative expected 0. □
revenue: RIIR,EAIR ≥ 0.
Non-negative valuation excludes the case of bilateral bargain-
ing addressed by Myerson and Satterthwaite (1983), where it is
Proof. From conditionally independent types, non-negative val-
impossible for the central planner to achieve allocative efficiency
uations, and null state, it follows that, for every i ∈ N and ωi ∈
without deficits. Non-negative expected payoff excludes the case
Ωi , of opportunism in the hold-up problem, where the sunk cost ci (bi )
⎡ ⏐ ⎤
∑ ⏐ is so large that it violates inequality (C.10). By eliminating these
vj g (ωi , ω−i ) , ω0 , ωj ⏐⏐ b⎦
)⏐
cases and replacing EPIR with IIR and EAIR, we can derive the
(
Eω−i ⎣
j∈N ∪{0} ⏐ possibility result in liability implied by Proposition C5.
⎡ ⏐ ⎤
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