Information Design in Allocation with Costly Verification

TL;DR

This paper studies how an information designer influences agents' private signals in an allocation setting with costly verification, aiming to maximize the principal's surplus while considering agents' utilities.

Contribution

It characterizes agent-optimal, principal-worst, and principal-optimal information structures in a costly verification setting, and introduces a robust mechanism achieving the principal's payoff.

Findings

Agent-optimal information is always principal-worst.

Existence of a robust mechanism that achieves the principal's payoff.

Results extend to multiple agents with some exceptions.

Abstract

A principal who values an object allocates it to one or more agents. Agents learn private information (signals) from an information designer about the allocation payoff to the principal. Monetary transfer is not available but the principal can costly verify agents' private signals. The information designer can influence the agents' signal distributions, based upon which the principal maximizes the allocation surplus. An agent's utility is simply the probability of obtaining the good. With a single agent, we characterize (i) the agent-optimal information, (ii) the principal-worst information, and (iii) the principal-optimal information. Even though the objectives of the principal and the agent are not directly comparable, we find that any agent-optimal information is principal-worst. Moreover, there exists a robust mechanism that achieves the principal's payoff under (ii), which is therefore an optimal robust mechanism. Many of our results extend to the multiple-agent case; if not, we provide counterexamples.