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Mechanism Design with Bilateral Contracting 1

We consider a setting where a principal cannot commit to a centralized grand-mechanism with all his agents but can only sign bilateral contracts with each of them. The principal can manipulate what he learns by contracting with an agent when dealing with others. Introducing this possibility for manipulations simplifies significantly optimal mechanisms. It restores both the continuity of the principal’s and the agents’ payoffs and that of the optimal mechanism with respect to the information structure. Still, correlation remains useful to better extract the agents’ information rent. A Revelation Principle with bilateral contracting characterizes the set of implementable allocations by means of simple non-manipulability constraints. Equipped with this tool, we derive optimal non-manipulable mechanisms in various environments.