Designing More Flexible Institutions: Theory and Applications

Abstract

In this thesis, I study the question of how a policymaker should make a decision when the information is dispersed among social agents whose characteristics are interdependent, i.e., one agent's type depends on both her own signal and others' information. There are two challenges for the policymaker to make the institution more flexible. First, the interdependence of the agents presents difficulty to characterize the optimal mechanism by its implied multidimensionality. Second, the policymaker may face uncertainty over the beliefs of the agents and the equilibrium they would choose. This thesis contributes to the design of more flexible institutions by developing novel tools and methodologies to tackle these challenges. This thesis also demonstrates several important applications of the new techniques.

Chapter 1 introduces a novel multidimensional majorization concept and shows the ordinal, topological features and convexity of the relevant function space. The new concept and properties are used to extend Myerson's ironing method for multivariate ironing of interdependent preferences. In this chapter, the multivariate ironing technique is used to solve a class of quasi-linear adverse-selection models with one principal and multiple agents.

As demonstrated in Chapter 1, the optimal solution involves a particular partition of the type profile space. In Chapter 2, however, we consider all allowable partitions and introduce an innovative approach to geometrise these. Allowable partitions, with refinement-coarsening partial order, form a poset that can be represented by a Hasse diagram. The poset can be transformed into its secondary polytope in Euclidean space by the characteristic function. Chapter 2 derives not only the optimal mechanism but also determines the payoff environment in which one particular partition is optimal.

Chapter 3 further introduces an admission-control scheme and derives the optimal public-control mechanism. The chapter examines two applications where public control plays an important role – supply chain regulation and club goods provision – to find the optimal policies for maximising social welfare. The chapter also provides some numerical examples to illustrate the characteristics of the optimal mechanisms with and without admission control.