COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1616

Dynamic Marginal Contribution Mechanism

Dirk Bergemann and Juuso Välimäki

July 2007

We consider truthful implementation of the socially efficient allocation in a dynamic private value environment in which agents receive private information over time. We propose a suitable generalization of the Vickrey-Clarke-Groves mechanism, based on the marginal contribution of each agent. In the marginal contribution mechanism, the ex post incentive and ex post participations constraints are satisfied for all agents after all histories. It is the unique mechanism satisfying ex post incentive, ex post participation and efficient exit conditions.

We develop the marginal contribution mechanism in detail for a sequential auction of a single object in which each bidders learn over time her true valuation of the object. We show that a modified second price auction leads to truthtelling.

JEL Classification: C72, C73, D43, D83

Keywords: Vickrey-Clarke-Groves mechanism, Pivot mechanism, Ex post equilibrium, Marginal contribution, Multi-armed bandit, Bayesian learning