Bose, Subir; Zhao, Jinhua

Journal of Economic Theory Vol. 135 (2007): 357-381.

We study the mechanism design problem when the principal can condition the
agent's transfers on the realization of ex post signals that are
correlated with the agents' types. Cremer and McLean (Econometrica,
53(1985) 345-361; 56(1988) 1247-1258), McAfee and Reny (Econometrica,
6(1992) 395-421), Riordan and Sappington (JET, 45(1988) 189-199) studied
situations where either the signals are rich enough, or the conditional
signal distributions and agents' payoffs are such that a mechanism can be
designed to fully extract the surplus from every agent. In this paper, we
study the optimal utilization of the signals when full surplus extraction
may not be possible. We assume that the cardinality of the signal space is
smaller than that of the type space and the Riordan and Sappington
conditions do not always hold. We study the optimal ways to utilize the
signals. For some tractable special cases, we investigate the optimal
mechanism and the level of surplus that can be extracted, and identify the
agent types who obtain rent.

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