Neutral optima in informed principal problems with common values
University of Exeter Economics Department Discussion Papers Series 09/02
In a class of informed principal problems with common values often used in applications we define a particular mechanism which we call the assured allocation. It is always undominated, i.e. efficient among the different types of the principal. We show it is a perfect Bayesian equilibrium allocation of the three-stage game studied in Maskin and Tirole (1992) that coincides with the Rothschild-Stiglitz-Wilson allocation when the latter is undominated. Under familiar conditions on hazard rates we show that the assured allocation is a neutral optimum in the sense of Myerson (1983).