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Mechanism Design with Collusion and Correlation

Jean-Jacques Laffont
David Martimort

Abstract

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.