Mechanism Design with Information Leakage

TL;DR

This paper explores the design of mechanisms, like auctions, that remain robust against information leakage, highlighting the importance of leakage-proof properties for implementing social choices and analyzing different auction formats.

Contribution

It introduces the concept of leakage-proof mechanisms, distinguishes it from ex-post incentive compatibility, and analyzes which auction formats are leakage-proof.

Findings

Second-price and ascending auctions are leakage-proof.

First-price auctions are not leakage-proof.

Leakage-proofness depends on tie-breaking in descending auctions.

Abstract

We study the design of mechanisms -- e.g., auctions -- when the designer does not control information flows between mechanism participants. A mechanism equilibrium is leakage-proof if no player conditions their actions on leaked information; a property distinct from ex-post incentive compatibility. Only leakage-proof mechanisms can implement social choice functions in environments with leakage. Efficient auctions need to be leakage-proof, while revenue-maximizing ones not necessarily so. Second-price and ascending auctions are leakage-proof; first-price auctions are not; while whether descending auctions are leakage-proof depends on tie-breaking.