A strict ex-post incentive compatible mechanism for interdependent valuations

• This paper addresses mechanism design in an interdependent value setting.
• This problem is important and non-trivial because of an impossibility result.
• The proposed mechanism improves the classic mechanism given by Mezzetti (2004).
• The improvement is in making the second round strictly incentive compatible.
• However, the improvement comes at the cost of subgame perfection.

The impossibility result by Jehiel and Moldovanu says that in a setting with interdependent valuations, any efficient and ex-post incentive compatible mechanism must be a constant mechanism. Mezzetti circumvents this problem by designing a two stage mechanism where the decision of allocation and payment are split over the two stages. This mechanism is elegant, however it has a major weakness. In the second stage, agents are weakly indifferent about reporting their valuations truthfully: an agent’s payment is independent of her reported valuation and truth-telling for this stage is by assumption. We propose a modified mechanism which makes truthful reporting in the second stage a strict equilibrium.