2 - Multi-Contracting Mechanism Design

Summary

INTRODUCTION

Incentive Theory is by now a mature field that has deeply changed our view of organizations and markets over the last thirty years or so. In the conceptual framework proposed early on by Hurwicz (1972) and largely inspired by the planification literature, the whole economy is ruled by a single (or complete) grand-contract. Within this framework, decentralized information and strategic behavior by informed agents at the periphery of the organization can easily be handled by means of simple incentive constraints that fully describe the set of feasible allocations available under asymmetric information. Once equipped with the Revelation Principle, modelers are able to describe the feasible set and assess the performance of an organization with a given objective function. The analysis can then proceed to determine the properties of the optimal contract chosen by a planner running this organization. Finally, one may also investigate the mechanisms that can be used to implement this outcome in practice.

This modelling framework is useful to understand how simple organizations and markets evolve in isolation from any external influence. Economists agree to recognize that a convenient set of modelling tools and theorems is now available to describe the simple contractual relationship between a buyer and a seller or between a regulator and regulated firms. We are also confident that the theory of auctions is a well-established body of literature which explains in detail one of the most basic resource allocation problems.