Incentives in Multi-dimensional Auctions under Information Asymmetry for Costs and Qualities

Abstract

This paper discusses the design of a novel multi-dimensional mechanism which allows a principal to procure a single project or an item from multiple suppliers through a two-step payment. The suppliers are capable of producing different qualities at costs which cannot exceed a certain value and the mechanism balances between the costs faced by the suppliers and the benefit the principal achieves from higher qualities. Iniatially, the principal implements a standard second score auction and allocates the project to a single supplier based its reported cost and quality, while then it elicits truthful reporting of the quality by issuing a symmetric secondary payment after observing the winner’s production. We then provide an alternate mechanism in which the principal issues an asymmetric secondary payment which rewards agents for producing higher qualities, while it penalises them for producing lower qualities than they reported. We prove that for both mechanisms truthful revelation of costs and qualities is a dominant strategy (weakly for costs) and that they are immune to combined misreporting of both qualities and costs. We also show that the mechanisms are individually rational, and that the optimal payments received by the winners of the auctions are equal to the payment issued by the standard second score auction.

This research is undertaken as part of the Danish Council on Strategic Research funded project on Foundations of Electronic Markets (CFEM). This is a collaborative project involving the Universities of Aarhus and Copenhagen, Copenhagen Business School, The Alexandra Institute, DCCA and industrial partners: DONG Energy, Energinet.dk, Inno:vasion, TradeExtension and Patrisia Market Design.