Participation Rights and Mechanism Design
by
Peter S. Faynzilberg
MEDS, Northwestern University

This paper is concerned with procedural aspects of collective choice and their effect on the optimal mechanism. Various imputations of the entry and exit rights, which govern the agents' participation and nonparticipation in the choice process, are analyzed.

We find that the participation constraint, which is commonly used to account for the voluntary aspect of the agents' participation, is redundant and may lead to suboptimal allocations. Being equivalent to a combination of the truth-telling, the (modified) participation, and the nonparticipation constraints, the incentive-compatibility alone accounts for all incentives, including those for participation. The voluntary aspect of participation is represented by a free-exit condition. The participation constraint describes, in contrast, the right of free entry that grants the agents an entitlement to force their involvement in the collective choice rather than abstain from it unilaterally.

Two optimization methodologies are presented: a stage-wise procedure and a characterization of the optimal mechanism. The stage-wise solution differs from both Baron-Myerson (1982) and Guesnerie-Laffont (1984) in that the scope of participation is treated endogenously. A complete characterization of the optimal contract in agency with hidden information is fully developed elsewhere (see presentation ''Optimal Selection of a Regulated Monopoly'').

We show that the optimal mechanisms generally exclude some agent-types from the choice process. Accordingly, both allocations and the scope of agents’ participation are determined endogenously, as illustrated on two principal-agent models solved in closed form.

Date received: June 7, 2000

Copyright © 2000 by the author(s). The author(s) of this document and the organizers of the conference have granted their consent to include this abstract in Atlas Conferences Inc. Document # cafc-99.