Markets vs . Mechanisms ∗

We demonstrate constraints on usage of direct revelation mechanisms (DRMs) by corporations inhabiting economies with securities markets. We consider a corporation seeking to acquire decision relevant information. In an environment with a securities market, the act of posting a standard DRM endogenously increases the informed agent’s outside option value. If the informed agent rejects said DRM, he convinces the market he is uninformed, and he can trade aggressively with low price impact, generating large (off-equilibrium) trading gains. Due to this endogenous outside option value effect, using a DRM to screen out uninformed agents may be impossible. Moreover, even when screening is possible, refraining from posting a mechanism and instead relying on markets for information is optimal if the endogenous change in outside option value is sufficiently large. Finally, even when posting a DRM dominates relying on markets, superior outcomes are achieved by introducing a search friction which randomly limits the agent’s ability to observe the DRM, forcing the firm to sometimes rely on markets for information.