Title:On the Informed Principal Model with Common Values

Abstract: This paper reconsiders the informed principal model with common values. It provides conditions that allow for the characterisation of the set of equilibrium allocations of the game in which the principal makes a take-it-or-leave-it offer of a mechanism to the agent. In particular, it is shown that the Rothschild-Stiglitz-Wilson allocation (i.e., the allocation that is undominated for the principal within the set of allocations that are incentive compatible for the principal and type-by-type individually rational for the agent) and every allocation that dominates it and is individually rational for the agent relative to the prior beliefs (if such an allocation exists) constitutes an equilibrium allocation whenever the RSW allocation is interim optimal relative to some strictly positive beliefs. If the principal confines herself to offering direct revelation mechanisms, the RSW allocation and every allocation that dominates and is individually rational for the agent relative to the prior beliefs (if such an allocation exists) constitutes equilibrium allocations without imposing any condition. Sufficient conditions are presented such that the set of equilibrium allocations is fully characterised. The results are shown to be in contrast to those obtained in Maskin and Tirole (1992) and illustrated in several economic applications.