Participation Rights and Mechanism Design

This paper is concerned with the procedural aspects of collective choice and the impact of the parties' participation rights on the optimal mechanism. We find that the mechanism designer generally benefits from the selective engagement of the agents-the exclusion of some agent-types from the choice process. We show that optimization of mechanisms with voluntary participation involves two mutually dependent instruments: the scope of the agents' engagement, and the functional form of the social choice function. The benefits of selective engagement, as well as two optimization methodologies, are illustrated on principal-agent models. We find that the participation constraint is redundant and generally leads tot suboptimal mechanisms. Contrary to its general interpretation, this restriction does not reflect the voluntary aspect of the agents' participation. Rather, it gives them an additional entitlement: to force their involvement in the collective choice. We formulate a free-exit constraint that is devoid of incentives and fully accounts for the voluntary aspect of participation. It also leads to an equivalent representation of incentive-compatibility that explicates incentives and specifies the feasibility of a mechanism. Key words: Participation rights, voluntary participation, economics of information, incentives, incentive compatibility, principal-agent model.

original papers : On the generalized principal-agent problem: Decomposition and existence results

This paper addresses the class of generalized agency problems: situations in which adverse selection and moral hazard are jointly present. We present a decomposition of the principal's optimization problem under the first-order approach that sheds light on the interactions between the two types of private information, and also significantly improves tractability. We use the decomposition to (1) provide examples of closed form solutions of the optimal contract, and (2) analyze the existence of optimal contracts. We also show that the first-order approach is valid in generalized agency problems if the production technology satisfies the linear distribution function condition (LDFC) in actions and types. For more general production technologies the Mirrlees-Rogerson sufficient conditions need to be extended to include restrictions on the form of the optimal contract.Generalized agency, moral hazard, adverse selection, separability, existence