Dynamic Mechanism Design

Abstract: This paper examines the problem of how to design incentive-compatible mechanisms in environments in which the agents private information evolves stochastically over time and in which decisions have to be made in each period. The environments we consider are fairly general in that the agents types are allowed to evolve in a non-Markov way, decisions are allowed to affect the type distributions and payoffs are not restricted to be separable over time. Our first result is the characterization of a dynamic formula for (the derivative of) the agents equilibrium payoffs in an incentive-compatible mechanism. The formula summarizes all local first-order conditions taking into account how current types affect the dynamics of expected payoffs. The formula generalizes the familiar envelope condition from static mechanism design: the key difference is that a variation in the current types now impacts payoffs in all subsequent periods both directly and through the effect on the distributions of future types. We first identify assumptions on the primitive environment that guarantee that our dynamic payoff formula is a necessary condition for incentive compatibility. Next, we specialize this formula to quasi-linear environments and use it to establish a dynamic revenue-equivalence result. Lastly, we turn to the characterization of sufficient conditions for incentive compatibility. We then apply the results to study the properties of revenue-maximizing mechanisms in a variety of applications that include dynamic auctions with AR(k) values and the provision of experience goods.

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Biography: Professor Ilya Segal is a Roy and Betty Anderson Professor in the Humanities and Sciences at Stanford University. He has taught in the university's Department of Economics since 2002. Segal is a specialist in contract theory and has developed models of transactions that take place in complex situations under conditions of uncertainty. He has shown, for example, why central governments of some countries wind up subsidizing failing firms. Firms are unable to commit to not renegotiate agreements, he argues, and this gives them an incentive to underinvest in productive assets that might reduce their subsidies. His work also explains why contracts to cover complex situations are often relatively incomplete even when complete contracts could have been written at a low cost. His research interests lie in the areas of Microeconomic theory, contract theory, information economics, industrial organization. He received his Ph.D. Harvard University; M.S. Moscow Institute of Physics and Technology (Applied Mathematics).

Ilya Segal