Econometrica: Jan, 2006, Volume 74, Issue 1

On the Generic (Im)Possibility of Full Surplus Extraction in Mechanism Design

https://doi.org/10.1111/j.1468-0262.2006.00654.x
p. 213-233

Aviad Heifetz, Zvika Neeman

A number of studies, most notably Crémer and McLean (1985, 1988), have shown that in generic type spaces that admit a common prior and are of a fixed finite size, an uninformed seller can design mechanisms that extract all the surplus from privately informed bidders. We show that this result hinges on the nonconvexity of such a family of priors. When the ambient family of priors convex, generic priors do allow for full surplus extraction provided that for at least one prior in this family, players' beliefs about other players' types do not pin down the players' own preferences. In particular, full surplus extraction is generically impossible in finite type spaces with a common prior. Similarly, generic priors on the universal type space do not allow for full surplus extraction.