Characterization of Incentive Compatibility of an Ex-Ante Constrained Player

TL;DR

This paper analyzes incentive compatibility in Bayesian mechanisms where players evaluate outcomes and constraints ex-ante, revealing that auto-bidding mechanisms in online advertising fully characterize such IC mechanisms.

Contribution

It provides a full characterization of incentive compatibility for ex-ante constrained Bayesian mechanisms, linking them to auto-bidding strategies used in online advertising.

Findings

IC mechanisms are characterized by the taxation principle.

Auto-bidding mechanisms fully describe incentive-compatible mechanisms.

The model applies to online advertising with changing types over time.

Abstract

We consider a variant of the standard Bayesian mechanism, where players evaluate their outcomes and constraints in an ex-ante manner. Such a model captures a major form of modern online advertising where an advertiser is concerned with her/his expected utility over a time period and her/his type may change over time. We are interested in the incentive compatibility (IC) problem of such Bayesian mechanism. Under very mild conditions on the mechanism environments, we give a full characterization of IC via the taxation principle and show, perhaps surprisingly, that such IC mechanisms are fully characterized by the so-called auto-bidding mechanisms, which are pervasively fielded in the online advertising industry.