Mechanism Design with Private Communication

This paper relaxes an important assumption of the mechanism design literature: That communication between the principal and each of his agents is public. Doing so yields two important results. First, it simplifies significantly mechanisms and institutions and shows the major role played by sell-out contracts, nonlinear prices and all-pay auctions. Second, it restores continuity with respect to the information structure but still maintains the useful role of correlation as a means to better extract the agent’s information rents. We first prove a Revelation Principle with private communication that characterizes the whole set of implementable allocations which cannot be manipulated by the principal by means of simple non-manipulability constraints. Equipped with this tool, we investigate optimal non-manipulable mechanisms in various environments of increasing complexity (unrelated projects, auctions, team production, more general production externality). We also demonstrate a Taxation Principle with private communication and draw some links between our framework and the common agency literature.