We introduce a model of probabilistic verification in a mechanism design setting. The principal verifies the agent's claims with statistical tests. The agent's probability of passing each test depends on his type. In our framework, the revelation principle holds. We characterize whether each type has an associated test that best screens out all the other types. In that case, the testing technology can be represented in a tractable reduced form. In a quasilinear environment, we solve for the revenue-maximizing mechanism by introducing a new expression for the virtual value that encodes the effect of testing.

No abstract

No abstract

A principal has to take a binary decision. She relies on information privately held by an agent who prefers the same action regardless of his type. The principal cannot incentivize with transfers but can learn the agent's type at a cost. Additionally, the principal privately observes a signal correlated with the agent's type. Transparent mechanisms are optimal: The principal's payoff is the same as if her signal was public. A simple cutoff form is optimal: Favorable signals ensure the agent's preferred action. Signals below this cutoff lead to the non-preferred action unless the agent appeals. An appeal always triggers type verification.

A principal must decide between two options. Which one she prefers depends on the private information of two agents. One agent always prefers the first option; the other always prefers the second. Transfers are infeasible. One application of this setting is the efficient division of a fixed budget between two competing departments. We first characterize all implementable mechanisms under arbitrary correlation. Second, we study when there exists a mechanism that yields the principal a higher payoff than she could receive by choosing the ex-ante optimal decision without consulting the agents.In the budget example, such a profitable mechanism exists if and only if the information of one department is also relevant for the expected returns of the other department.We generalize this insight to derive necessary and sufficient conditions for the existence of a profitable mechanism in the n-agent allocation problem with independent types.