DP6357 Protocol Design and (De-)Centralization

Author(s): Hans Peter GrĂ¼ner
Publication Date: June 2007
Keyword(s): decentralization, EU, mechanism design, Protocol design, Turkey
JEL(s): D23, D71, D74, D86
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6357

Should privately informed agents with diverging interests act independently or should they commit to a mechanism? This paper analyzes different communication and decision protocols when communication involves delay. It studies under which conditions agents should (i) choose their actions immediately and non-cooperatively, (ii) communicate and act independently or (iii) contract before receiving their information. Well informed agents with similar preferences do not contract or communicate. Communication is desirable when preferences are similar and individual signals are of intermediate quality. Contracting on a Bayesian mechanism only pays when agents' preferences are not too strongly correlated, when information quality is high, and when the cost of delay is sufficiently low. When the correlation is negative and large enough, the optimal contract does not involve any communication.