An efficient solution to the informed principal problem

In this paper I study mechanism design by an informed principal. I show that generically this problem has an ex-post efficient solution. In the equilibrium mechanism, the informed principal appropriates all expected social surplus, with each type of her getting all expected social surplus conditional on that type. This outcome is supported as a perfect sequential equilibrium of the informed principal game when the joint probability distribution from which the agents’ types are drawn satisfies two conditions: the well-known condition of Cremer and McLean and Identifiability condition introduced by Kosenok and Severinov [Individually rational, budget-balanced mechanisms and allocation of surplus, J. Econ. Theory (2002), forthcoming]. Conversely, these conditions are necessary for an ex-post efficient outcome to be attainable in an equilibrium of the informed principal game. Under these conditions only our equilibrium outcome constitutes a neutral optimum, i.e. cannot be eliminated by any reasonable concept of blocking [R. Myerson, Mechanism design by an informed principal, Econometrica 51 (1983) 1767–1797]. Identifiability and Cremer–McLean conditions are generic when there are at least three agents, and none of them has more types than the number of type profiles of the other agents.