Credible Mechanisms

In this Department of Economics Theory Seminar, Shengwu Li, from Harvard University discusses his paper on Credible Mechanisms

Consider an extensive-form mechanism, run by an auctioneer who communicates  sequentially and privately with agents. Suppose the auctioneer can make any deviation that no single agent can detect. This seminar looks at the mechanisms such that it is incentive-compatible for the auctioneer not to deviate – the credible mechanisms. Consider the optimal auctions in which only winners make transfers. The first-price auction is the unique credible sealed-bid mechanism. The ascending auction is the unique credible strategy-proof mechanism. 

Auctions are used to sell a wide variety of goods - art, fish, real estate, treasury bonds, internet advertising, wireless spectrum, and, in 193 AD, the entire Roman Empire (Shubik, 2004). The theory of optimal auctions pins down only a few features of the auction format. Under the standard assumptions, if bidders with higher values submit higher bids, and thereserve price is optimally chosen, then the auction is optimal (Myerson, 1981).

Despite this, most real-world auctions are variations on just a few canonical formats - the first-price auction, the ascending auction, and (more recently) the second-price auction (Cassady,
1967; McAfee and McMillan, 1987).1 Why?

In his seminar,  Shengwu Li sheds light on this question by proposing a framework for mechanism design under partial commitment.