1. Arbitration and MediationL6
Goltsman et al. (JET 2006)
Melumad and Shibano (RAND 1991)
Blume, Bord and Kawamura (TE 2007)
Aumann and Hart ECMA 2003,
Krishna and Morgan 2004

2. Institutions
CS assumes a particular extensive form of communication game
Some institutions (message protocols) improve upon CS
Two approaches
Optimal design of institutions given incentive constraints
Particular extensive forms
Questions
What is the upper bounds on welfare
Mechanisms though which protocols improve communication
How they compare to best CS equilibrium?

3. Mechanism design Two agents: Sender (S) and Receiver (R) Type space:
Preferences
Abstract Message space
S sends message to intermediary, who makes recommendations to R
Recommendation rule
Intermediary:
Arbitration (binding recommendations)
Mediation (not binding)

4. Myerson’s revelation principle
Commitment: Myerson’s revelation principle
Direct mechanism
Incentive compatibility S
Incentive compatibility R

5. Outline Set of feasible - Arbitration - Mediation
generated in SPN equilibrium of some communication game
We look for rules that are ex ante optimal for R
Upper bounds
For mediation and SPN equilibrium ex ante welfare of R and S aligned

6. Arbitration Problem: Incentive compatibility:
Truth telling required to be ex post optimal for S (IC-S)
Rule need not be (ex post) optimal for R.

7. Simplifying observation 1: sufficient statistics
Fix recommendation rule
For any report
Expected utility of type given report
For any statistics are sufficient S for payoff

8. Simplifying observation 2: principal agent problem
Interim S welfare
Define
Problem
Expectation is an ``action’’ and variance is a ``transfer’’
Difference:
No participation constraint
Bound on ``transfer’’

9. Incentive compatibility (IC-S)
Fix and hence
Double continuity of ICS constraints
Mirrlees (1975)
Let
L: satisfies IC-S condition iff
a) Is nondecreasing b) c)
Proof

10. Incentive compatibility (IC-S)
Is IC-S for some
Is IC-S for some

11. Optimal arbitration rule
Assume
T: Optimal mechanism is deterministic with
Melumad and Shibano (RAND 91)
Remarks:
Delegation with cap is optimal
For bubbling is optimal for R (no information transmission)
S -optimal rule

13. Heuristic argument :

14. Mediation Problem: Incentive compatibility:
Truth telling required to be ex post optimal for S (IC-S)
Rule has to be (ex post) optimal for R.
Can optimal arbitration rule be implemented in a mediation setting?

15. Optimal Mediation Mechanism
Partition
T: Optimal mediation mechanism
Upper bound for receivers ex ante utility is
Mechanism is pooling
Arbitrage mediation most informative equilibrium in CS
Mediator’s only role is to introduce noise

17. Interpretation ``Broken’’ phone paradox
Blume, Bord and Kawamura (TE 2007)
With probability instead of signal receiver observes
Informative equilibrium implements optimal mediation outcome
Two effects of noise
Makes the signal less informative
Relaxes IC constraint for S fostering more truthful revelation
The latter effect dominates

18. Negotiations
Multistage cheap talk Aumann and Hart 2003, Krishna and Morgan 2004
Better than most informative CS
Upper bound for welfare of R –mediation outcome-sometimes achieved
Intuition: multistage noise allows for randomization

19. Conclusions Commitment of external party improves welfare
Delegation is optimal if feasible
Noisy cheap talk can improve information transition
Can be implemented as multistage cheap talk