Abstract
In common agency games, one cannot characterize all equilibria by considering only direct mechanisms. In an attempt to overcome this difficulty, Peters [1] and Martimort and Stole [2] identi?ed a class of indirect mechanisms (namely, menus) which are able to characterize every equilibrium. Unfortunately, menus are difficult to handle, and several methodologies have been proposed in the literature. Here, it is shown that, even if authors consider menus rather than simpler mechanisms, many equilibria described in the literature could have been characterized by direct incentive compatible mechanisms. Use of more sophisticated mechanisms was not necessary in these cases.
Highlights
The restriction to direct incentive compatible mechanisms is a cornerstone of contract theory
Peters [1] and Martimort and Stole [2] show that an equivalent of the Taxation Principle makes it possible to characterize any equilibrium of any common agency game
The problem with this approach is that the concept of menu is large for common agency games, and, even if it simplifies the game, equilibria remain hard to characterize
Summary
The restriction to direct incentive compatible mechanisms is a cornerstone of contract theory It provides a simple and elegant method for characterizing arbitrary equilibria in any principal-agent model, even with very complex communication between the players. Peters [1] and Martimort and Stole [2] show that an equivalent of the Taxation Principle (they call it Delegation Principle) makes it possible to characterize any equilibrium of any common agency game The problem with this approach is that the concept of menu is large for common agency games, and, even if it simplifies the game, equilibria remain hard to characterize. The present paper shows that, in almost all models of the common agency literature, equilibria characterized by menus could have been characterized by direct mechanisms. The basic intuition is that menus can characterize a large set of equilibria because a principal, by using a menu, can create sophisticated rewards
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