Econometrica: Mar, 2000, Volume 68, Issue 2

Mechanism Design with Collusion and Correlation

https://doi.org/10.1111/1468-0262.00111
p. 309-342

Jean‐Jacques Laffont, David Martimort

In a public good environment with positively correlated types, we characterize optimal mechanisms when agents have private information and can enter collusive agreements. First, we prove a weak‐collusion‐proof principle according to which there is no restriction for the principal in offering weak‐collusion‐proof mechanisms. Second, with this principle, we characterize the set of allocations that satisfy individual and coalitional incentive constraints. The optimal weakly collusion‐proof mechanism calls for distortions away from first‐best efficiency obtained without collusion. Allowing collusion restores continuity between the correlated and the uncorrelated environments. When the correlation becomes almost perfect, first‐best efficiency is approached. Finally, the optimal collusion‐proof mechanism is strongly ratifiable.