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Dynamic Mechanism Design: Incentive Compatibility, Profit Maximization And Information Disclosure

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Executive Summary

This paper examines the problem of how to design incentive-compatible mechanisms in environments in which the agents' private information evolves stochastically over time and in which decisions have to be made in each period. The environments the authors consider are fairly general in that the agents' types are allowed to evolve in a non-Markov way, decisions are allowed to affect the type distributions and payoff are not restricted to be separable over time. The first result is the characterization of a dynamic payoff formula that describes the evolution of the agents' equilibrium payoff in an incentive-compatible mechanism. The formula summarizes all local first-order conditions taking into account how current information affects the dynamics of expected payoff.

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