Summary
We study the problem faced by an incomplete information monopolist seeking to design a line of contracts so as to simultaneously screen consumers by type and resolve the moral hazard problems associated with contract performance. We formulate the monopolist's problem as a mechanism design problem in which the set of consumer types is taken to be a Polish space, and the contract space an arbitrary compact metric space. Allowing for risk aversion on the part of the monopolist and consumers, and taking as the feasible set of mechanisms the collection of all measurable functions defined on the space of consumer types with values in the space of contracts, we present a new characterization of incentive compatibility in an infinite dimensional setting which allows us to reformulate the monopolist's design problem as an unconstrained optimization problem (i.e., as a problem without the incentive compatibility contraints). Using simple techniques, we then demonstrate the existence of an optimal screening mechanism for the monopolist. We thus extend the existing analysis of the incomplete information monopoly problem to an infinite dimensional setting with moral hazard, and we provide an existence result not available in the existing literature.
Similar content being viewed by others
References
Ash, R.A.: Real analysis and probability. New York: Academic Press 1972
Berge, C.: Topological spaces. New York: MacMillan 1963
Himmelberg, C.J.: Measurable relations. Fundam, Math.LXXXVII, 53–72 (1975)
Himmelberg, C.J., Parthasarathy, T., VanVleck, F.S.: Optimal plans for dynamic programming problems. Math. Operat. Res.1, 390–394 (1976)
Holmstrom, B.: On the theory of delegation. In: Boyer, M., Kihlstrom, R. (eds.) Bayesian models in economic theory. Amsterdam: North Holland 1984
Ionescu Tulcea, A: On pointwise convergence, compactness, and equicontinuity in the lifting topology I. Z. Wahrscheinlichkeitstheor. Verw. Geb.26, 197–205 (1973)
Maitra, A.: Discounted dynamic programming on compact metric spaces, Sankhya Ser. A30, 211–216 (1968)
Maskin, E.S., Riley, J.: Monopoly with incomplete information. Rand J. Econ.15, 171–196 (1984)
Mathews, S., Moore J.: Monopoly provision of quality and warranties: an exploration in the theory of multidimensional screening. Econometrica55, 441–467 (1987)
McAfee, R.P., McMillan J.: Multidimensional incentive compatibility and mechanism design. J. Econ. Theory46, 335–354 (1988)
Myerson, R.B.: Optimal coordination mechanisms in generalized principal-agent problems. J. Math. Econ.10, 67–81
Nowak, A.S.: On Zero-sum stochastic games with general state space I. Probab. Math. Stat.IV, 13–32 (1984)
Page Jr., F.H.: The existence of optimal contracts in the principal-agent model. J. Math. Econ.16, 57–167 (1987)
Parthasarathy, K.R.: Probability measures on metric spaces. New York: Academic Press 1967
Protter, M.H., Morrey Jr., C.B.: A first course in real analysis. Berlin Heidelberg New York: Springer 1977
Yannelis, N.C.: Set-valued functions of two variables in economic theory. In: Khan, M.A., Yannelis, N.C., (eds.) Equilibrium theory in infinite dimensional spaces. Berlin Heidelberg New York: Springer 1991
Author information
Authors and Affiliations
Additional information
I thank seminar participants at Indiana University, McGill University, and the University of Calgary for helpful comments. I also thank Kerry Back, Bob Becker, Praveen Kumar, Mark Johnson, Ramon Marimon, Murat Sertel, Bill Sealey, Gordon Sick, and Nicholas Yannelis for helpful comments. The comments and suggestions of an anonymous referee are especially appreciated. I am solely responsible for any errors.
Rights and permissions
About this article
Cite this article
Page, F.H. Mechanism design for general screening problems with moral hazard. Econ Theory 2, 265–281 (1992). https://doi.org/10.1007/BF01211443
Received:
Revised:
Issue Date:
DOI: https://doi.org/10.1007/BF01211443