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Direct Mechanisms, Menus and Latent Contracts

Piaser, Gwenaël (2007): Direct Mechanisms, Menus and Latent Contracts.

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Abstract

In common agency games, one cannot characterize all equilibria by considering only direct mechanisms. In an attempt to overcome this difficulty, Peters [Econometrica, 2001]and Martimort and Stole [Econometrica, 2002] identified 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.

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