Dynamic mechanism design: An elementary introduction

TL;DR

This paper provides an elementary introduction to dynamic mechanism design, explaining how static mechanism results extend to dynamic settings and analyzing optimal, efficient, and budget-balanced mechanisms.

Contribution

It offers a clear, accessible overview of dynamic mechanism design, including conditions for incentive compatibility and the properties of specific mechanisms.

Findings

Necessary and sufficient conditions for perfect Bayesian incentive compatibility.

Uniqueness of Groves mechanism in dynamic settings.

Analysis of budget balance in dynamic pivot mechanisms.

Abstract

This paper introduces dynamic mechanism design in an elementary fashion. We first examine optimal dynamic mechanisms: We find necessary and sufficient conditions for perfect Bayesian incentive compatibility and formulate the optimal dynamic mechanism problem. We next examine efficient dynamic mechanisms: We establish the uniqueness of Groves mechanism and investigate budget balance of the dynamic pivot mechanism in some detail for a bilateral trading environment. This introduction reveals that many results and techniques of static mechanism design can be straightforwardly extended and adapted to the analysis of dynamic settings.