Veto Constraint in Mechanism Design: Inefficiency with Correlated Types

Compte, Olivier; Jehiel, Philippe

doi:10.1257/mic.1.1.182

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American Economic Journal: Microeconomics: Vol. 1 No. 1 (February 2009)

AEJ: Micro Volume. 1, Issue 1 | left

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Veto Constraint in Mechanism Design: Inefficiency with Correlated Types

Article Citation

Compte, Olivier, and Philippe Jehiel. 2009. "Veto Constraint in Mechanism Design: Inefficiency with Correlated Types." American Economic Journal: Microeconomics, 1(1): 182-206.

DOI: 10.1257/mic.1.1.182

Abstract

We consider bargaining problems in which parties have access to outside options, the size of the pie is commonly known and each party privately knows the realization of her outside option. We allow for correlations in the distributions of outside options. Parties have a veto right, which allows them to obtain at least their outside option payoff in any event. Besides, agents can receive no subsidy ex post. We show that inefficiencies are inevitable whatever the exact form of correlation, as long as private information is dispersed. We also illustrate how veto constraints differ from ex post participation constraints. (JEL C78, D82)

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Authors

Compte, Olivier (Paris School of Economics)
Jehiel, Philippe (Paris School of Economics and U College, London)

JEL Classifications

C78: Bargaining Theory; Matching Theory
D82: Asymmetric and Private Information

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