COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1421

ROBUST MECHANISM DESIGN

Dirk Bergemann and Stephen Morris

May 2003

The mechanism design literature assumes too much common knowledge of the environment among the players and planner. We relax this assumption by studying implementation on richer type spaces, with more higher order uncertainty.

We study the "ex post equivalence" question: when is interim implementation on all possible type spaces equivalent to requiring ex post implementation on the space of payoff types? We show that ex post equivalence holds when the social choice correspondence is a function and in simple quasi-linear environments. When ex post equivalence holds, we identify how large the type space must be to obtain the equivalence. We also show that ex post equivalence fails in general, including in quasi-linear environments with budget balance.

For quasi-linear environments, we provide an exact characterization of when interim implementation is possible in rich type spaces. In this environment, the planner can fully extract players’ belief types, so the incentive constraints reduce to conditions distinguishing types with the same beliefs about others’ types but different payoff types.

Keywords: Mechanism design, Common knowledge, Universal type space, Interim equilibrium, Ex-post equilibrium, Dominant strategies

JEL Classification: C79, C82