Contingent Mechanisms with Endogenous Information

In most of the literature on mechanism design, two important assumptions are made. First, agents have a given amount of private information and their incentives to acquire more information are unmodeled. Second, the payment by an agent depends only on his report and not on the realized valuation. However, in many important practical settings, these assumptions do not apply. For example, in the sale of financial or business assets, firstly potential buyers often perform due diligence to investigate the quality and compatibility of the assets before submitting offers. Moreover, it is costly to acquire information. The legal and accounting costs of performing due diligence often amount to millions of dollars. Secondly, values of the auctioned assets are contractible. Indeed, when selling a company to an acquirer or soliciting venture capital, equity and other securities are commonly used. Other examples include spectrum auctions, highway building contracts, lead-plaintiff auctions, authors selling publishing rights and sports associations selling broadcasting rights. We call mechanisms in which the payment by an agent is contingent on his ex-post payoff contingent mechanisms (in contrast to cash mechanisms). Surprisingly, few studies have considered contingent mechanisms with information acquisition. In this project, I will compare the performance of different contingent mechanisms and study the design of optimal contingent mechanisms when agents can covertly acquire information at some cost. These theoretical exercises help us understand the degree to which the characteristics of optimal mechanisms depend on the above two assumptions, and provide guidance for the use of different mechanisms in practice. More specifically, I first consider security-bid auctions in which the seller restricts the security design to an ordered set and uses a standard auction format (e.g., first- or second-price auction). The preliminary result shows that auctions using steeper securities provide lower incentives for agents to acquire information. Furthermore, this difference in incentives to acquire information may overturn the revenue ranking among security designs in earlier work. I will then study the design of optimal linear and nonlinear contingent mechanisms, respectively, when information is endogenous.