Mechanism Design with Information Leakage

Abstract

We study the design of mechanisms---e.g., auctions---when the designer does not control information flows between mechanism participants. A mechanism equilibrium is leakage-proof if no player conditions their actions on leaked information; a property distinct from both ex-post and posterior incentive compatibility. Only leakage-proof mechanisms can implement social choice functions in environments with leakage; efficient auctions and revenue-maximizing ones need to be leakage-proof. Second-price and ascending auctions are leakage-proof, while first-price auctions need not be. Appropriately designed Dutch auctions are leakage-proof and attain optimal revenue even with irregular value distributions. In multi-unit environments, leakage-proof mechanisms can attain the optimal Bayesian revenue even when dominant-strategy mechanisms cannot.