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.